According to data from the College Board, the average annual college tuition for 2020-21 was roughly $38,000 at private colleges and $10,560 for state institutions (in-state students). Student loan debt is something you want to avoid, so you need smart ways to save for your kid’s college. Here are six tips to help you meet your college savings goal.
1. Start Early
One of the smartest ways to save for your kid’s college is to start as soon as possible. The earlier you begin setting aside money, the more you’ll have by the time they head to college. Set a goal and plug this into your monthly budget.
2. Manage Your Money
You’ll be better able to save for your kid’s college once you have your finances in order. Be sure you have a budget, are tracking your spending, and are minimizing debt. Save for emergencies so that you don’t have to go into debt to cover these expenses. A healthy family budget will provide you with the cash you need to start investing in your child’s college education.
3. Invest in a 529 Plan
A 529 investment plan is an easy way to save for your kid’s college. You can also use the funds to cover the costs of K-12 tuition and apprenticeship programs. In addition, any gains are tax-deferred, and you can withdraw the money tax-free as long as you use it to pay for qualified education expenses.
Every state has at least one type of 529 savings plan, but you’re not limited to your state. It’s best to shop around and look for the best plans, such as those that offer tax credits and deductions. There are minimum deposit requirements, but in many cases, this is as low as $25. So even if your monthly budget is tight, you can start putting a small amount of money into a 529 investment plan.
4. Open a Roth IRA
Yes, a Roth IRA is for your retirement, but you can also use the funds to pay for your kid’s college education. Unfortunately, unlike a 529 savings plan, you lose out on the income tax deduction that many states offer. However, a Roth IRA is an effective way to put away after-tax dollars without worrying about earnings and investment growth taxes.
5. Invest in Mutual Funds
Investing in mutual funds, stocks, bonds, index funds, and other assets is a flexible way to save for your kid’s college expenses. If you begin early and focus on long-term investments, you could end up with all the funds you need to pay for college. You’ll have to pay taxes on capital gains and dividends, though.
6. Set Up a Coverdell Education Savings Account
The Coverdell ESA is similar to the 529 savings plan. You can set it up and make contributions to benefit your child. The money grows tax-free and can be invested in bonds, stocks, and other assets. Your contributions are not tax-free, though, and the Coverdell ESA is limited to those who make less than $110,000 if you’re a single parent or $220,000 if you’re married and filing jointly.
The smartest way to save for your kid’s college is to start as soon as they’re born. Of course, your first priority is to save for emergencies and retirement and pay your bills. So, in the early years, put away whatever you can, no matter how small. Then, as your financial situation improves, take advantage of the investment savings strategies listed above. If you begin early, your savings will grow, and you’ll have made significant progress toward covering your children’s college education.