The sooner parents start saving for their children's college funds, the more ready they'll be to grapple with rising tuition rates years down the road. Students who have more money saved for college are less dependent on loans, allowing them to start saving for adulthood even while still in school. In addition, more savings usually means less debt later on. However, with the costs involved in raising children, most parents are not able to save as much money up front as they would like.
Here are some tips to help parents start building their college funds for their children:
Savings is Like a Bill
Treat the college fund as a monthly bill. Set up a separate savings account just for the child's college fund. Estimate how much is needed to send the child to school and divide that by the number of months until he or she would be ready to enroll in college. This amount should be how much parents work to put away in this account and should be budgeted in with other monthly bill commitments. The only issue parents may encounter is the money is easily accessible when simply putting it in a savings account. If an emergency arises, it will be tempting to take money out of the account in the hopes of returning it before the child goes to college.
529 College Savings Plans
Parents can set up a 529 college investment account for their child's college education. These accounts allow deposits toward tuition to be made, and these deposits essentially grow with inflation; better yet, they grow tax-free. These accounts can be started with as little as $25 up front and the money can be used to pay for any accredited college or university in the U.S.
Education savings accounts
Education savings accounts are similar to an IRA, but is used for funding college instead of retirements. Contributions up to $2,000 per year (post-tax dollars) can be made into these accounts and the money grows tax-free. There are no penalties as long as the money is withdrawn for education purposes.
Most states offer prepaid tuition plans. These plans allow parents to lock in today's tuition rates by prepaying tuition for their child's college education. The money saved through these plans has to be used at a college within the same state the plan was started. These plans are an effective way to build a college fund, as long as the child wants to attend college in the same state.
Though not all parents want to dip into their 401K from work, it is an effective way to pay for a child's education. Payments toward the 401K are automatically taken out of the parent's paycheck and set aside in an account. Because the money is taken out before the paycheck is disbursed, there is less of a chance this money will be used to pay for something else.
There are many different ways parents can pay for their child's education. Everything from saving it on their own to prepaying the tuition are effective ways to ensure the child has their college paid for before enrolling.