It's no secret that the cost of college is increasing. It has actually eclipsed the pace of inflation, and total student loan debt is now higher than even credit card debt.
But we also know that there's a direct correlation between future success/income and going to college. So what's a parent to do? There's really no getting around the simple fact that you're going to need to for your child's education. Gone are the days of a student being able to work a part-time job to pay for college. Today, that might cover the cost of books.
But it's not all depressing, there are lots of ways to save for your kid's college tuition.
529 Plans A 529 plan is the most common type of savings vehicle for college, and it is one of the best ways to invest in your child's future. Each state offers its own plan or plans. While you don’t have to choose a plan offered by the state you live in, some states offer incentives -- like tax breaks -- for putting money in your own state’s 529. (There is no federal tax break for contributions.)
The money in a 529 can be easily invested. Everything the account earns is tax-free on the federal and state level as long as the money is used for higher-education expenses. Education costs include tuition, fees, books and even room and board. And should the beneficiary not need the money for college or technical school, you can change the designated beneficiary to another family member.
Another feature of 529 plans is flexibility. Anyone can start a 529 (whether it's your family, friend or relative) in a child's name and make contributions as often as they'd like. The donor also controls the account until it is used. If you plan to invest any portion of your child's college fund, the earlier you start, the better. As your child approaches college age, you will want to reduce your risk, and your returns are likely to be lower as a result. If you want to take full advantage of the stock market you'll need to invest as early as possible in order to withstand the typical volatility of the markets.
Coverdell Education Savings Accounts Another option for parents is putting money aside in a Coverdell Education Savings Account. The contributions are low (only $2,000 a year), and they are not tax-deductible. But the account grows tax-free until it is distributed. Also, money in these accounts can go to higher education costs or for private school at the elementary and secondary levels -- or to pay for an academic tutor or for college-entrance test preparation classes. In general, the funds have to be used within 30 days of the beneficiary turning 30. And like a 529 plans, the accounts can be transferred to another family member.
Roth IRAs Roth individual retirement accounts are most commonly talked about for retirement. But you can use money saved in a Roth IRA to fund educational expenses. With a Roth IRA, you generally have more control over how the money is invested, but there are lower yearly contribution limits than for 529 plans. And if your child doesn't go to college, the money can stay in the Roth for retirement. (Financial planners warn, however, that you should not shortchange your own retirement savings in order to pay for your child's college.)
Muni Bonds If you're in a high income tax bracket, tax-free muni bonds could make sense. Bonds won't usually equal the return of the stock market, but they are less risky. And since muni bonds are also tax-free, the actual return could be closer to stock market returns than you think. Look for a bond term that will expire when your child is ready to go to college.
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