Have you started to think about how your kids (or you!) are going to pay for college? I was able to put myself through college waiting tables at a well-known seafood restaurant in a small town in California and graduated with no student loans, yay me! Is that still a possibility for our children?
As parents, we want the best for our children and graduating with crippling student loan debt is not the best thing for them! We don’t want them to be behind before they even start. I am not sure about you, but my starting salary right out of college was not very substantial and I can’t imagine trying to keep ahead of my regular bills while paying 100s a month in student loans. According to CollegeRaptor.com, it costs on average over $20,000 per year to go to a public 4-year college! I have a 2-year old that will be ready for college in 16 years. Just imagine with the cost of inflation it will cost well over $100,000 for her to receive a college education, Woah! We have a dream for her to get a full-ride softball scholarship, but so far her throwing and catching is not that impressive. So we need a backup plan if softball doesn’t work out and we should start saving now. Here are some ways you can start saving to send your kid to college.
A 529 plan is a popular college savings plan known as a qualified tuition plan. The 529 plan is popular because your money can grow without paying capital gains tax and no tax upon withdrawal. The 529 plan is controlled by the owner (parent) and not the beneficiary (child) so the owner can make sure the money is being used for education.
A 529 plan also does not have income limits, but it does have limits on how much you can contribute each year. The downside of a 529 plan is that financial aid counts it and your child may receive less financial aid as a result. You will also pay regular taxes and a 10% penalty tax on the earnings if you withdrawal from it for non-qualified educational expenses.
A Coverdell Education Savings Account is referred to as an ESA. It is the other main type of college savings plan. ESA was created by the U.S. government to help families save for education expenses for their beneficiaries.
An ESA, like a 529 Plan, is not taxed if used for qualified education purposes. A benefit of an ESA is they can be invested in multiple different ways such as stock, bonds, or mutual funds. Another benefit of an ESA is it can be used for K-12 expenses as well as college expenses. Unfortunately, the contribution limit per year per child is $2,000 and must be fully withdrawn by the time the beneficiary reaches 30.
UGMA or UTMA
UGMA stands for Uniform Gift to Minors Act and UTMA stands for Uniform Transfer to Minors Act. Both are custodial accounts in the child’s name but are controlled by the custodian. UGMA/UTMA accounts allow stock, bond and mutual fund investments. At the age of 18 for UGMA or the age of 21 for UTMA, control is transferred to the child and they can do whatever they want with the money. A big difference between UGMA/UTMA and the other savings plans is that they can be used for things other than education. Maybe the child wants to put a down payment on a house or take a year off and backpack across Europe. They can use the money for anything once they are of age, without the custodian’s input. That may be a pro or a con depending on what is right for your family.
UGMA/UTMA accounts have no contribution limits. For tax purposes, the minor is the owner of the account and the earnings can be taxed at the child’s usually lower tax rate. If the minor is under 19 or 24 as a full time student, and the unearned income is less than $2,100 in 2019, it can be taxed at the child’s tax rate. Anything over $2,100 in 2019, would be taxed at the custodian’s tax rate.
Most scholarships are awarded when the student is in high school, but did you know that some scholarships can be awarded as early as kindergarten? It seems like most of the scholarships for younger children involve art. For high school-aged children, the types of scholarships are endless! FinAid.com is a great website that has a lot of national scholarships listed. Your child can win a scholarship for building a model rocket! How fun to work on that and maybe win some money for college. Most of the high school-aged scholarships involve writing an essay. Many scholarships are for local children so check what your community is offering also. There is plenty of free money out there so have your child take advantage of it!
We love to hear from you. There are many different ways to save for your child’s college expenses. Please share what you are doing to save.