College Funds: Investing for Your Child’s Future
The time to prepare for your child’s higher education is now. We explore college funds and how you can start investing for your child’s future.
Education is expensive. According to EducationData.org, the average annual cost of college tuition in the United States is $35,720, representing an annual growth of 6.8% over the past 20 years.
Assuming this growth continues at the same rate, babies born in 2021 will be expected to pay approximately $115,000 annually, equating to a financial burden of $460,000 for a four-year degree.
However, as parents, there are things we can start doing now to help mitigate this financial burden.
1. Investing in a 529 Plan
A 529 Plan is a tax-advantaged education savings account which can be used to pay for K-12 tuition and college/trade school expenses. Under a 529 Plan, the savings growth is tax-deferred and qualified withdrawals are tax-free. These plans are offered by most states and financial institutions. However, no matter where the parent decides on opening the account, the child can use the funds in the account to attend a college, university, or trade school anywhere in the country.
Most 529 Savings Plans offer investment opportunities based on the level of security the parent would elect. This means the amount of growth in the account varies depending on the current economic market.
Per an average rate of return of 12% and a monthly investment of $100 per month for 18 years, parents would have the ability to save approximately $76,000 to put towards their child’s education expenses. Of course, the more a parent puts into the account, the better. However, it is important to note that some states and financial institutions have contribution limits on their 529 Plans.
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2. Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UGMT) Accounts
A UGMA or UGMT account is similar to a 529 account in that it is opened in the child’s name with a custodian (typically a parent or legal guardian). The funds in the account are invested and earnings are determined by the stock market. However, unlike a 529 Plan, the funds do not have to be used for college. So, if your child decides they do not want to go to college, the funds in the account can be withdrawn for other uses without any tax penalties.
A UGMA and UGMT account also does not have any contribution limits and all earnings are taxed on the tax bracket your child falls under, not yours.
3. Invest in a Safe Savings Account
While a 529 Plan can offer high potential growth, it can also experience great losses, depending on the current economy and stock market. One safe thing a parent can do is open up a basic savings account, money market account, or a certificate of deposit through their financial institution. These accounts will still offer a small return in monthly or annual interest.
According to the FDIC, the national average interest rate on savings accounts at the time of this writing is 0.05% APY. However, if parents go this route, it is important to do the research, as some financial institutions offer better rates on their savings accounts, especially if the account holds a high balance. It is also important to ensure that the financial institution is insured by an organization such as the FDIC so if the institution should close, your money will be safe.
4. Start Applying for Scholarships as Early as Elementary School
Many individuals think scholarships are only for high school or college students. However, this is not the case. Many organizations offer scholarships for younger students, starting with elementary school-aged students.
Some examples of scholarships out there include the Doodle 4 Google Scholarship or the Ayn Rand Institute Essay Scholarship. Most states and school districts will also hold scholarship contests through the school year. So keep an eye out for scholarships your student is eligible for, even if they are not yet in high school.
No matter how you decide you want to start saving for your child’s future, it is important to set a goal and get started saving. It is also important, when your child is older, to communicate the importance of the money set aside and how to use it responsibly whether for college, trade school, or another large purchase in their future.
Reviewed April 2021
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