Investing in Education: When to Start Saving for College

As time goes on, college keeps getting more expensive. In fact, over the past 40 years, the cost of a college education has risen by 169%. This means if you have young kids, the price might be much more expensive by the time your child is ready to head off for school.

Still, investing in education has never been more necessary. Most jobs now require people to have a bachelor’s degree or equivalent experience. This is true even if the position is entry-level. Below, we’ll get into when and how you should start building your college savings account. Keep reading to learn more so you can set your child up for success!

When Should You Start Investing in Education?

The first step to giving your child a great higher education experience is to set up a savings account for them.

The amount you want to set aside for your child is up to you. Some families like to pay for all their child’s college education. Others split the costs with the child. The former lets them focus on their studies, while the latter teaches them the value of working hard for their money.

There’s no right or wrong answer here. Your decision should take into account your personal financial situation as well as your goals for your child’s education.

No matter what you decide, you need to start saving for their education as soon as possible. The sooner you start saving, the more you can put toward their college. If possible, begin saving as soon as you know you’re having a kid. This will put less financial pressure on you later.

What to Know Before You Save

Before you start saving, you should know the cost you might be expected to pay for each child to attend college.

The current cost for in-state public universities is $26,820 per year on average. If your child chooses to go to a private college, that number skyrockets to an average of $54,880 a year.

Of course, many variables exist. For instance, if your child receives a scholarship, the cost of their education will go down. Many students also apply for financial aid. Through this, they learn if they’re eligible for student loans or maybe even a grant.

If they get loans, the cost of education won’t get lowered. Instead, they’ll use the loan money to pay for the education and then pay off the loans once they start their post-college careers.

Knowing all this should help you decide how much per year you want to save for college. Work with an accountant to figure out how much you should set aside on an annual basis. Then, you’ll have the opportunity to put as much money away as you can without breaking your finances.

Opening a 529 Plan

Those who want to start investing in education for their children can open a 529 plan.

A 529 savings plan is a tax-advantaged savings account. This means that the plan either isn’t taxable, is tax-deferred, or offers other tax-related benefits. You can use a 529 plan for a wide variety of educational expenses. These include K-12 tuition, student loan payments, and college tuition.

Whenever you contribute to the plan, those contributions will compile interest. This gives you more money to use than you had before.

You can also use 529 money to pay for college textbooks and other miscellaneous college expenses. You can take the money out of the 529 account at any time. Yet, if you use the money for anything other than an educational expense, you might have to pay taxes on the money.

So, you should make sure you can afford to contribute to the account without needing to withdraw from it.

Who Can Open a 529 Plan?

Any U.S. resident who lives in the United States and has a mailing address in America can open a 529 plan. In addition, the person must be over the age of 18 and have a tax ID or social security number.

The person who receives the money must also have a social security number or tax ID. If you’ve moved to the United States from another country and your child does not yet have a social security number, you will need to wait until they have one. Get one as soon as possible so you can start saving with the 529 plan.

Coverdell Education Savings Accounts (ESAs)

Coverdell Education Savings Accounts (ESAs) owe their name to Senator Paul Coverdell from Georgia. Senator Coverdell sponsored the legislation in order to make education more affordable for parents.

Coverdell ESAs allow you to save up to $2,000 per child on an annual basis. These contributions are made after-tax payments. They are tax-free, as are the earnings that grow in the accounts. You also won’t have to pay taxes when you withdraw money.

This type of plan enables families to save for college and other education-related expenses. The major difference between a Coverdell ESA and a 529 plan is that Coverdell ESAs allow you to withdraw money for K-12 expenses that aren’t related to tuition.

Should You Use Roth Individual Retirement Accounts (IRAs)?

Most families use Roth Individual Retirement Accounts (IRAs) to make sure they have enough money once they stop working. Yet, you can also use your Roth IRA to save for college.

Roth IRAs provide 7%-10% interest returns each year when you contribute to them. Since they’re meant to help you save for retirement, some people erroneously believe you can’t withdraw from them before you’re older. This isn’t true, though. You can withdraw from a Roth IRA at any time.

Yet, doing so you’re 59.5 years old will trigger a 10% fee and taxes. So, although many people use IRAs to save for college, you might want to explore other options.

Interested in Investing in Education?

Investing in education helps you provide your child with a brighter future. After all, the more you save, the better schools you’ll have the opportunity to afford.

A great education starts early. That’s why we’ve founded The Learning Experience. Our programs provide young children with exciting, age-based educational opportunities.

If you want to set your child on the path to success, find a center and check us out today!