Paying your child's tuition is something every parent would like to do, but where should you start? Learn everything you need to know about paying for college.
The beginning of a student’s college years is both an exciting and daunting time for parents; on one hand, there’s the pride of seeing your child head off to school, the first step on their path to professional success, and on the other, there’s the anxiety caused by the high cost of higher education. This financial challenge has led many parents to the perennial question: How do you pay for your child’s college tuition? For many families, the best way to tackle this goal will be to start setting money aside as early as possible in a child’s life while taking advantage of one or more savings and investment plans, which can provide sizeable returns over the years, but that’s not the only option out there. Below, the college savings plan experts at Sootchy will take a look at some of the most common ways families cover the enormous expense of higher education; keep reading to find out more.
It may take a while, but savings accounts offer a time-honored way to pay for substantial expenses, including college tuition. These accounts can take many forms, from the standard savings option available at your local bank to state-sponsored options like 529 plans, and each comes with its own pros and cons. Let’s take a look at two of the more popular tools for paying your child’s education costs:
Though the details tend to vary from state to state, all 529 plans share some useful characteristics – namely, they offer tax advantages at the federal and (sometimes) state levels. With most investment plans, gains are treated as income and taxed as such by the government, either as they accumulate or, more often, when the funds are withdrawn from the account.
However, just as the money in a Roth IRA can be used tax-free once you hit age 60, the funds in a 529 plan can be used on qualified education expenses – such as college tuition – without triggering a tax on the income. The money in these accounts can grow tax-free as well, and families have the option to pick any state’s plan when enrolling. A few states offer tax breaks for residents who invest in that state’s plan, though, which can help make college tuition a bit more affordable in the long run.
Though they come with many of the same benefits as 529 plans, such as tax-free earnings and education-related distributions, Coverdell accounts face some limitations that can make them less effective as tools to pay for college tuition in particular. For one thing, contributions are limited to $2,000 per year, far less than the $100,000+ limits on 529 plans, and the account is automatically placed in the beneficiary’s control when they turn 18. The main benefit of Coverdell accounts is that they offer enhanced flexibility in elementary and secondary school, so they’re less often used for higher education.
Although savings can go a long way toward covering the cost of a college education, the huge price tag at schools across the country can render even the most consistent effort to save money inadequate to the task. To supplement these savings, families often turn to alternative sources of funding; we’ll examine a few of these below.
When trying to pay for your child’s tuition, there’s little reason not to seek out – or encourage them to seek out – free money in the form of grants and scholarships. Many of these opportunities require only an application or short essay, and the funds they contribute can quickly add up. In some cases, your child’s school might offer money in this way, and there is a large number of private organizations that provide funds as well.
One key facet of paying for your child’s tuition with scholarships and grants is that they can help through all four years of college, not just the first. If you manage to cover the expenses of freshman year with these contributions along with your personal savings, keep up the good work, and your family might just be able to avoid taking on debt.
Two words that have become the bane of many young adults’ existences, student loans are nevertheless an effective way to pay for college, and most families rely on them to some degree to cover at least part of their child’s college tuition. Not all loans are created equal, however; it’s important to look at interest rates and repayment options when choosing your student loans.
In effect, the goal for your family should be to minimize the need for student loans as much as possible. Even moderate student debt can hinder a person’s personal and financial growth by limiting their ability to take part in life or save up for other large expenses, such as buying a home. By leveraging the methods outlined above and taking the time to prepare early in your child’s life, you can help ensure their financial freedom after graduation and set them up for long-term success.
Saving up for college may be important, but that doesn’t mean it has to be complicated. With help from the team at Sootchy, you can open a 529 plan for your child quickly and easily. To learn more, visit the Sootchy website or download our smartphone app today.