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Smart Ways to Set Up a College Fund for Kids


A college education is one of the main ways many of us aim to give our children every advantage in life. However, with higher education expenses reaching new highs year after year, it’s increasingly important to save for their college expenses – and do so in the most effective ways possible. Here are some smart ways to do just that. Consider working with a financial advisor as you seek to build up funds for higher education.

When Should I Start Saving for My Kid’s College?

Here’s the short answer: Now.

That may seem counterintuitive. After all, it’s a long way off, and your child may not even go to college. But you don’t want to preclude their options. So, err on the side of caution and assume they will. Besides, vocational and trade school training also entail costs.

Saving early is also the top recommendation from college students and recent graduates, according to Fidelity’s Lessons Learned Study on college savings. Of the respondents, 42% wish they had started saving earlier.

How Much Should I Save for My Kids College?

Having a savings strategy is the best tool on your side when it comes to high-priced goals. Unfortunately, education is one of the pricier milestones for U.S. citizens.

According to College Board’s 2020 publication in the Trends in Higher Education Series, every form of higher education increased in price from the 2019-2020 school year. These were the average costs for a full-time undergraduate during 2020-2021 (including room and board):

  • A public two-year in-district school: $12,850
  • A public four-year in-state school: $22,180
  • A public four-year out-of-state school: $38,640
  • A private nonprofit four-year school: $50,770

However, we all know many schools in the U.S. exceed those numbers. Some of institutions in this country reach annual tuition in the $70,000 range. In addition, the price of tuition has increased drastically in the last 20 years. Increases range from 144% to 212%, depending on the type of institution. So, it’s hard to give an exact number – especially if you have financial restrictions or certain goals.

But you shouldn’t always aim to cover 100% of the expenses. Depending on your situation, you may only want to save for a portion. Some turn to the 1/3 rule. With that, you pay the cost with one-third past income, one-third from your current income and leave one-third for loans.

Or, another rule is the 2k rule of thumb created by Fidelity. With this, you multiple your child’s age by 2,000. That’s how much you should have saved. So, if your child is 5, you should have around $10,000 in a fund for him or her. The goal here is to help parents cover about half of the cost of a four-year public college. You can adjust numbers based on your circumstances.

Types of College Funds for Kids

Saving for collegeCollege graduates are at a disadvantage these days. Before they can even get out into the workforce, they’re slammed with thousands of dollars in student debt. As a parent or grandparent, you want to give them the best chance to avoid debt – or mitigate it at the very least. With the right plan and enough hard work, these college fund options should help:


UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gift to Minors Act) are both custodial savings accounts. Parents, or guardians, can set up these accounts with a minor as the recipient.

In a way, they work like a trust – the adult deposits assets into the account. Then, the child earns ownership over both the principal and possible investment returns when he or she turns 18 or 21.

They do function slightly differently, however. UTMA accounts hold any type of asset, including real estate, whereas UGMA accounts are limited to financial products. That includes investments and securities like bonds, cash, stocks and mutual funds.

Since the child owns the funds once he or she gets older, the child has control over it. Teaching responsible spending and saving habits will help prepare the child for managing these assets.

529 Plans

You probably see 529 plans recommended for every parent. Every state sponsors a minimum of one of these common savings plans. And with good reason – they’re designed to help you save for future education costs.

One of the biggest advantages to parents with a 529 plan is that it’s tax-advantaged. So, money put into the account can grow tax-free. That ultimately allows you to build up your finances thanks to compound interest. On top of that, they stay tax-free as long as you use them for their intended purpose. Students often use these funds to cover tuition expenses, class fees and pay for necessary materials like books.

Keep in mind: Using the money for anything else comes with a penalty. Nonqualified withdrawals get hit with a 10% penalty and federal income tax.

Education Savings Account (ESA) or Education IRA

An education savings account (ESA) works similarly to a Roth IRA. You make contributions to it regularly that grow tax free. However, this account is specifically designed for education expenses.

They come with two helpful features. One, they typically come with a higher rate of return than you find with a savings account. And two, they also hold after-tax money. That leaves the ESA to grow with your child, tax-deferred, as long as you put the funds toward educational costs.

However, contributions are limited, and you must sit under an income limit to qualify. The beneficiary must also use the funds by a certain age. But you can transfer the money to a younger sibling if the original beneficiary ages out.

Eligible Savings Bonds

Many people invest to save for their long-term goals. Savings bonds are a low-risk way to do that.

The government guarantees the savings bonds, which means you face extremely little to no risk when you invest in them. That low amount of risk also means you can only expect moderate returns, though. But the guarantee on the funds makes it worthwhile for many students. Especially since you can exclude them from your annual gross income when using them for higher education.

There are some restrictions when it comes to savings bonds. For example, the interest exclusion only applies to Series I and Series EE savings bonds.

Roth IRA

Typically, Roth IRAs are retirement accounts, but they don’t have to be. You can contribute to it at any age without the hassle of required minimum distributions (RMDs). So, the money stays in the account as long as you need it to.

Like a 529 plan, contributions in a Roth IRA grow tax free. And, since you use taxable income, you can make withdrawals tax-free as well. However, that can change if you take money out before the age of 59.5 or the account is younger than five years old. Still, you can avoid a 10% penalty if the withdrawal is for a specific purpose, like education.

The best part of using a Roth IRA is that it will still come in handy if your child doesn’t go to college. You can keep the funds and put them towards your retirement instead.

Tips for Saving for Your Kid’s College

Few people would call college “affordable.” But you can lessen the burden by building a solid savings plan. Some of it may depend on you, but don’t be afraid to get your children involved. They should feel like the  play a part in their education. Here are some ways they can do that:

The Takeaway

College graduatesFinding the right savings options for you can help make it easier to prepare financially for your child’s college. That way, your child has enough for a great education without putting anyone into severe debt. Also, listen to your children as they grow. Look for their areas of interest, or help them think about alternative options. For example, some may want to pursue a trade instead or a bachelor’s degree.

Tips on Saving for College

  • While many parents take on the bulk of college costs, kids can help, too. Students can get a part-time job to help bring in extra cash. With their own income, students have the money to cover smaller costs like books or even just snacks. That way, parents only have to worry about the greater expenses. Consider using SmartAsset’s paycheck calculator to see how much you can put towards everyday school costs.
  • Whether it’s up to you to cover education costs or you have financial support, there’s more to paying for college than you think. A strong strategy can help you along the way. That’s where a financial advisor comes in. This expert can help you reach your goals for financing your student needs. SmartAsset’s free matching tool connects you with local financial advisors on your side. If you’re ready, get started today.

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