Understanding Your Options When Saving for Educational Expenses

Understanding Your Options When Saving for Educational Expenses

A jar of coins for a college fund representing educational expenses and savings.

Outside of purchasing a home, paying for college can be the most expensive item that a person may ever purchase. With college expenses increasing yearly, it creates a moving target for most people looking to return to school. However, this should inspire you to start saving early and regularly to help defer these costs. To help you understand how to save for college, check out these options. Then, decide which educational expenses make the most sense for your financial situation.

529 Plans

There are two types of 529 plans. There is the traditional 529 Savings Plan and the Prepaid College Tuition plan. Both of these plans require you to put money aside today for use in the future. Use the money for any educational-related expenses after investing in the stock market. So, remember to keep the growth and decline in mind during the market's ups and downs. Both plans are also considered assets when applying for financial aid. The primary difference? The Prepaid College Tuition plan locks in today's tuition rate for a student going to school in the future for any in-state, public institutions.

This option is great for anyone who envisions themselves, or their child, going to a state-sponsored school. However, if you or your child decide to attend a private school, don't worry. Indeed, use the money for this option. In this case, it will be used to pay for that school at its current rate. As of today, only a handful of states offer the prepaid college tuition plan option, including Florida, Maryland, and Texas. Before investing in any type of savings plan, it is important to examine the fees associated with maintaining the account along with the tax benefits for your individual situation.

Roth IRAs

Similar to the 529 plans, Roth IRAs invest in the stock market. While many people think of Roth IRAs as retirement accounts, use them to pay for educational expenses as well. However, this only works if the amount of money withdrawn equals the amount of money contributed. For example, if you, or a grandparent, want to pay for a child's education, your age and income levels dictate the maximum amount contributed. If you contribute $4,000/yr. for 4 years, you can take out $16,000 tax-free.

Aside from the tax advantages, anyone in the family uses these funds without having them earmarked from birth. Another great advantage to this is that any funds not used for college will automatically become retirement savings. If you create a Roth IRA for a child, this starts saving for retirement with any funds paying college expenses.

Savings Accounts for Educational Expenses

Another method of paying for college is to start a high-interest savings account for your child. This type of account, unlike a 529 plan, does not have management fees or other costs associated with it. However, the rate of return will be much lower. This option is great for anyone who is looking to put in funds as they become available. Oftentimes, family contributions from aunts, uncles, and grandparents feel much more personable when they give money to the child for their education. The interest earned on this type of an account is taxable and, given the lower rate of return, usually grows at a slower pace.

Learn More About Your Educational Expenses

Whether you choose one of the 529 plans, a Roth IRA or high-interest savings account, saving for college for yourself or your child is a good step in the right direction. The more you cash-flow this endeavor, the better you will be in the long run.

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