The days seem long gone when kids could work summer jobs and save up enough money to pay a substantial portion—if not all—of their college tuition. Today, students borrow tens of thousands of dollars to cover the cost of their college degrees, and it seems the price tag is only going to go up.
That’s bad news for parents hoping to save enough money to help their children make college more affordable. The statistics are grim. A recent study found that fewer than 40 percent of middle-income families were putting money aside for college. And even those who do save for college are falling far short of their goals. The average family wants to save around $40,000. But they’re ending up with less than $20,000.
Saving is tough. Add up all the things you’re supposed to be saving for—emergency funds, home maintenance, car repairs, retirement—and it’s easy to see why college savings fall by the wayside.
It helps to have a plan—and to know that a plain old savings account is definitely not the way to go. There are better investment options to choose from.
- 529 College Plans. More than 30 states, including New Hampshire and Vermont, offer investment opportunities called Qualified Tuition Programs. The 529 accounts are a breeze to set up online, and they allow your savings to grow at much faster rates than a savings account. Start early—how about as soon as your child is born—and make automatic installments of $50 a month, and you could have more than $20,000 in 18 years. When you draw the money out, you pay no taxes.
- Roth IRA. You may already be saving for retirement in a Roth IRA, but did you know those funds can be used for educational expenses? You generally have to wait until you’re 60 years old to withdraw money for retirement purposes, but you can withdraw for qualified educational expenses after just five years. Another nice thing about a Roth IRA for college savings? If your child doesn’t attend college after all, you’ve still got that money for your retirement. It’s a win-win investment option.
- Coverdell Education Savings Account. These accounts are similar to 529 plans, but they come with an added benefit. They can be used for K-12 educational costs. If you foresee private school in your child’s elementary, middle, or high school future, the Coverdell ESA covers all your bases.
- Prepaid College Tuition Plans. These plans aren’t for everyone. They are currently offered in only about a dozen states, and they are only an option if you know for sure your child will attend a state school. But if that’s your situation, they’re worth checking out. Prepaid tuition plans allow you to lock in the cost of college at today’s prices. With the way tuitions are going up, that could amount to a whole lot of savings.
Another option is applying for scholarships! Check out this article on scholarship searching for more information.