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The Best Ways to Save for College: A Parent’s Guide

4 minute read time

SUMMARY

This article provides a concise guide on the three best ways to save for college: 529 plans, Coverdell Education Savings Accounts and UGMA/UTMA accounts, along with a life stage savings chart and practical tips to help families plan and save for higher education expenses efficiently.

As the cost of higher education continues to rise, starting to save for college early can make a significant difference in managing expenses down the line. Here’s everything you need to know to plan for your child’s future:

When should I start saving?

Short answer: It’s never too early to start investing in your child’s education. This chart outlines a clear roadmap to help you maximize your savings and ensure you’re set up for success:

Life Stage Age of Child Savings Goal Recommended Actions
Pre-Pregnancy N/A Establish a savings mindset
  • Research college savings options
  • Set a preliminary savings goal
Pregnancy 0-1 years

Begin initial savings
  • Open a 529 plan or another dedicated college savings account 
  • Contribute a small, regular amount (example $50/month)
Infancy  1-5 years Build a foundation
  • Increase monthly contributions as your budget allows
  • Explore tax-advantaged savings options
  • Set up a savings goal for each year 
Early Childhood 5-10 years Steady growth
  • Continue regular contributions
  • Reassess your savings goal based on current college costs
  • Start educating your child about the importance of saving
Pre-Teen  10-13 years

Accelerate savings
  • Increase contributions if possible
  • Explore investment options within your 529 plan
Teenage 13-18 years Maximize savings
  • Maximize contributions to your 529 plan
  • Explore part-time jobs or side hustles for your child to contribute
  • Research fiancial aid, scholarships and grants
High School Senior 17-18 years Finalize savings
  • Review and finalize your savings plan 
  • Complete financial aid applications (FAFSA, ect.)
  • Compare college costs and financial aid offers
  • Talk with your financial advisor about other options for finance college education
College Years 18-22 years Manage and use savings
  • Use savings to cover tuition, books and living expenses
  • Continue to monitor and adjust the budget as needed
  • Encourage your child to work part-time or intern 

 

3 Effective College-Savings Tools 

529 Plans

529 plans are state-sponsored investment programs specifically designed for educational savings, offering two distinct options: prepaid tuition plans and education savings plans. Prepaid tuition plans enable you to purchase units or credits at participating colleges and universities for future tuition at today's prices, which can be a strategic way to manage future educational costs. On the other hand, education savings plans allow you to open an investment account to save for a variety of future college expenses, including tuition, mandatory fees and room and board.

Benefits:

    • Tax Efficiency: Gains accumulate tax-free and withdrawals are tax-free for eligible educational expenses. 
    • State Incentives: Many states offer income tax deductions or credits for contributions. 
    • Flexibility: Accounts can be transferred between relatives. 
    • Accelerated Gifting: Contributors can make a substantial initial deposit by combining five years' worth of the annual gift tax exclusion.

UGMA/UTMA Accounts

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are custodial accounts that allow assets to be held in a minor’s name without the need for an attorney to establish a trust. These accounts are used to gift or transfer assets to minors and the funds can be used for any purpose to benefit the minor, not just educational expenses.

Benefits:

    • Flexibility: Funds can be used for any purpose to benefit the minor. 
    • Control: Once the minor reaches the age of majority (18 or 21, depending on the state), they gain control of the account.

Considerations: 

    • Financial Aid Impact: Assets in these accounts are considered the minor's property, potentially affecting financial aid eligibility.

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts (ESAs) are tax-advantaged investment accounts designed to cover educational expenses from kindergarten through college. These accounts offer flexibility in funding various educational needs.

Benefits:

    • Broad Coverage: Covers expenses from kindergarten through college, including tuition, fees, books, supplies and technology. 
    • Tax-Free Growth: Contributions grow tax-free and distributions are tax-free for qualified expenses. 

Limitations:

    • Contribution Limits: $2,000 per year per beneficiary. 
    • Age Restrictions: Contributions can only be made until the beneficiary turns 18 and funds must be used by age 30. 
    • Income Limits: Higher-income earners may be restricted from contributing. 

5 Tips to Save for College

  1. Start Early: The earlier you start, the more time your investments have to grow. Even small contributions can add up over time.
  2. Maximize Tax Benefits: Take advantage of tax-free growth and potential state tax deductions by choosing the right savings tool. 
  3. Evaluate Flexibility: Consider the flexibility of each account type, especially if you have multiple children or if educational needs may change. 
  4. Monitor and Adjust: Regularly review your savings plan to ensure it aligns with your current financial situation and educational goals. 
  5. Seek Professional Advice: Consulting with a financial advisor can help you make informed decisions and optimize your savings strategy. 

Planning for college expenses is crucial, and choosing the right savings account for you is based on your unique circumstances. Working with an advisor can help you make an informed decision that best suits your needs and supports your educational aspirations. Connect with an advisor today to discuss the best option for you and your family.