It’s never too early to start putting money aside for your child’s college education. If you want to help them go to a good school, and stay out of student debt, the ideal time to start saving is as soon as they’re born. The more time you allow, the more interest can accrue. If you haven’t started saving yet, and your child is already a few years old, don’t worry. There are still plenty of ways to put money away, to cover part, if not all, of their college tuition. Here are a few.
A 529 plan is probably the most direct way to save for your child’s college. It’s a state-run program, available in almost every state, by which you open an account and contribute to it periodically. When your child is ready for college, that money can then be used for tuition, textbooks, room and board, and other college expenses. In many states, you can open a 529 plan with as little as $25. After that, you can contribute as much or as little as you want or can afford. You can have money deducted from your bank account monthly, or add it in lump sums as you can afford it.
There are two types of 529 plans. The first is a College Savings Plan, which works similarly to a 401K. You contribute to the account regularly, and that money is invested and grown over time, until it’s ready to be put towards tuition at the college of your child’s choice. The second is a Prepaid Tuition Plan, in which you pay the money directly to your state’s public university program. Then when your child gets to college, at least some, if not all of their tuition, has been covered in advance. Or, if your child decides not to go to a public university in your state, they can transfer the money to a different college, public or private.
529 plans are very flexible, and the earnings on it are tax-deferred. Different states have different rules for their 529 plans, and different ways of setting them up. However, if you don’t like the one your state has, you can invest in a different state’s 529, if you prefer.
Savings bonds are a great long-term investment for a number of purposes, but there are some that can be specifically designated for college. Buy these bonds for your children, and they accumulate interest over the years. When your child is ready to go to college, the bonds can then be redeemed, tax-free, for college tuition.
There are two types of college savings bonds. Series EE bonds are guaranteed to double in value over a given period of time. Series I bonds offer a fixed rate of return, which is adjusted for inflation as time goes on. Both can provide a significant return for low risk, which can cover part or all of your child’s college tuition.
Permanent Life Insurance Policy
With life insurance, you pay the premiums over time, which accrue interest and grow in value. Then, when you die, your beneficiaries receive the value of the policy. However, permanent life insurance works a bit differently.
Part of your premium goes toward your death benefit. The rest is put into a tax-deferred savings account, which also continues to grow and accrue interest over time. You can then access the money whenever you like, to do with as you please—including pay for your child’s college tuition.
On the one hand, this account isn’t counted as an asset for tax purposes, and thus won’t be a hindrance when your child applies for additional financial aid. On the other hand, however, there are also certain fees, both at the beginning, and ongoing, which you may want to discuss with your financial advisor before committing to.
College is growing more and more costly all the time. As expensive as it is now, it’s just a drop in the bucket compared to what it will likely be when your child is ready to start applying. That’s why it’s so important to start saving now. With the right financial plan and proper investment, you can secure your child’s future now, without having to pay an arm and a leg. Contact Tostrud and Temp at 608-784-8060 to learn more!