In the United States, the total amount of student loan debt is a whopping $1.749 trillion. Each former student owes over $37,000 on average. This debt is growing even faster than the national economy.
To avoid this burden, parents need to begin a college savings fund for their children long before they hit 18. If parents start saving when their child is young, it’s a lot easier to cover the full cost of tuition. They could even throw in some living expenses as well.
To find out more about how to save for college, check out the information below.
A 529 Plan
This option is also known as a qualified tuition plan, and it is one of the most common ways to save for college. It has many benefits, including tax breaks and minimal impact on your child’s financial aid eligibility.
This investment grows tax-free and can be withdrawn to pay for educational expenses with zero tax liability. Most states even offer state tax credits toward it. These benefits make it a better choice for college savings than a traditional brokerage, IRA, or mutual fund account.
Old school parents often go the U.S. savings bond route for building a college fund. If redeemed for educational expenses, these investments are tax-free.
Although the return on investment is small, the United States government backs these bonds. Barring the fall of American society, they are a low-risk investment.
Education Savings Accounts
Educational savings accounts (ESA) are similar to 529 plans. Interest accrued and money withdrawn for educational expenses are tax-free. Unfortunately, this money will be considered when your child applies for financial aid.
Another drawback to this type of savings account is the restrictive limits on contributions. Only $2,000 per year can be contributed toward a beneficiary.
Individual Retirement Accounts (IRA)
A Roth IRA is commonly used for retirement, but savings can also be withdrawn for educational expenses without a withdrawal penalty. Like an ESA, you must disclose this money on a student’s financial aid application.
Custodial Brokerage Accounts
When an adult opens a brokerage account on behalf of a child, it’s known as a custodial account. This route is better for funding future living expenses while the child is in school. Bear in mind that earnings through these investments are taxed once they reach a certain amount.
For more off-the-grid investments, you can also use a brokerage to buy and sell crypto. For example, you can buy Chainlink and other cryptocurrencies and hold them in your account, or sell when you’re up.
The Path to College Savings
The right path to college savings for your child depends on your unique needs and financial situation. The most popular way to save for college is the 529 plan, though it’s not designed to cover a student’s living expenses. Parents may want another investment strategy for things like food and rent.
To read more on topics like this, check out the Lifestyle category