The leaves are changing, the weather is cooling down, and football is finally back—there’s always a lot happening in fall. But wait, there’s more! September is also National College Savings Month, a time to celebrate the power of investing in education and securing a brighter future for our children and grandchildren.
What is National College Savings Month?
National College Savings Month is an annual observance designed to raise awareness about the importance of saving for higher education. It’s a chance to shine a spotlight on the potential of college savings plans and their impact on shaping students’ lives.
In today’s world, with the growing cost of higher education, saving for college can seem a challenging task. But with a bit of planning and thoughtful decision-making, we can create a brighter future for our children.
In honor of National College Savings Month, let’s explore some tips for saving for college, as well as information about some of the most popular college savings plans.
Tips for Saving for College
According to the Education Data Initiative, the average cost of attending college (i.e., taking a four-year undergraduate degree program at a postsecondary institution) is $26,436 per student per year.1 With this figure in mind, it’s clear why saving for college is a major financial goal for many parents. Here are some tips to help save for college:
Early planning is key to successfully saving for college. By starting to save as soon as possible, you can take advantage of the power of compounding interest, allowing your funds to grow over time. Time is a valuable ally in building a substantial college fund.
Creating a carefully planned budget is essential. Knowing your income, expenses, and how much you can allocate to your college fund each month will help you stay on track and meet your goals. Even modest contributions can make a significant difference over time—remember, consistency is key.
Choose the Right Investment Option
Selecting the appropriate investment option is critical to optimizing your college savings strategy. Options such as a 529 plan, a Coverdell Education Savings Account (ESA), or a custodial account have unique features and benefits. Research and compare these options to find the one that aligns best with your college savings goals.
How to Save for College
There are many different college savings plans and accounts available, and it is important to choose the one that best suits your financial goals and needs. Here are three of the most common college savings vehicles:
A 529 plan is a tax-advantaged savings plan designed to help families save for future education expenses. Contributions to a 529 plan are made with after-tax dollars, and the earnings grow tax-free.2 When withdrawals are used for qualified education expenses, they are exempt from federal taxes.
Each state typically offers its own 529 plan, and you may have the flexibility to choose any state’s plan that suits your preferences. Some states may also provide additional tax incentives to residents.
Coverdell Education Savings Account (ESA)
A Coverdell ESA is another tax-advantaged option for college savings. As in a 529 plan, earnings in a Coverdell ESA grow tax-free. Contributions are limited to $2,000 per year per beneficiary, and the funds can be used for qualified elementary, secondary, and higher education expenses.3
Eligibility for a Coverdell ESA is subject to an income test, so this type of savings vehicle may not be available to everyone. Nevertheless, it can be a valuable educational savings tool for those who qualify.
Opening a custodial account, such as a UTMA or UGMA account, is a straightforward way to save for a child’s education.4 With this type of account, an adult custodian manages the funds on behalf of the child until they reach the age of majority. There are no restrictions on how the funds can be used, which provides considerable flexibility.
It’s important to note that custodial accounts lack the tax advantages of 529 plans and Coverdell ESAs; however, they can still be a viable option for some investors.
National College Savings Month is an excellent opportunity to take proactive steps toward securing a solid educational foundation for your loved ones. While the journey may seem challenging, remember that every contribution counts.