Kapadia LLP CPAs

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Let’s get the “firehose of cold water in the face” statistic out of the way first: According to the research team at the Education Data Initiative, the average cost of college—including books, supplies and daily living expenses—at a four-year institution for first-time, full-time undergraduates is now $36,436 per year.  

It doesn’t matter how young (or non-existent) your children are right now. If you’re a parent—or plan to be a parent—it’s nearly inevitable that you’ll be faced with figuring out how to pay for college one day. That’s why financial professionals advise starting to save for college as early as possible. Here are two primary reasons why: 

• Education costs are rising. As shocking as that $36K figure is, it will probably only go up from here, given that tuition and related costs have consistently risen over the past decades. The Education Data Initiative report says the average cost of college has more than doubled in the 21st century, with an annual growth rate of 2% over the past 10 years. By starting a college savings fund early, you can help mitigate the impact of those increasing costs. 

• Student debt is also rising. The average college graduate is saddled with significant student loan debt—the average federal student loan debt is $37,787—and spends roughly 20 years paying off their loans. That means it’s entirely statistically possible you may still be paying down your own student loans. Saving for college can help reduce or even eliminate the need for loans, freeing your children from years of student loan debt.

Plus, establishing a college savings fund can be a good way to teach children about saving, investing and the value of long-term planning. It also puts a spotlight on the importance and expectations of higher education, whether at a four-year university, your local community college or trade school.  

Is it too late to start saving? And where do you start? 

Given the power of interest and compounding, the earlier in your child’s life that you can start saving, the better. But even if your child is in high school, it’s not too late; anything you can save will reduce the amount you need to borrow.

Here are six common options for college savings plans:

1. 529 plan—A 529 plan is an education savings plan operated by a state or educational institution and designed to help families set aside funds for future college costs. Earnings in 529 plans aren’t subject to federal tax and, under certain circumstances, state tax. 

2. Coverdell education savings account (ESA)—A Coverdell ESA is a trust or custodial account set up solely for paying qualified education expenses for the designated beneficiary. There’s a limit on how much can be contributed each year.  

3. UGMA/UTMA accounts—The Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are custodial accounts that allow parents to save and invest on behalf of a minor. These accounts are not strictly limited to educational expenses. However, unlike 529 plans and Coverdell ESAs, earnings and withdrawals from UGMA/UTMA aren’t tax-free. 

4. Savings bonds—The Education Bond Program allows qualified taxpayers to exclude from their gross income all or part of the interest paid upon redemption of eligible Series EE and I bonds after 1989, when the funds are used to pay qualified higher education expenses. 

5. IRA accounts—IRA accounts aren’t just for retirement; if you’ve been making contributions for at least five years, you can also use either a traditional or Roth IRA for qualified college payments, but there are differences in how the taxes are treated. Because there are a number of rules governing the use of an IRA for education expenses, you’ll want to work with your financial advisor to understand the advantages and disadvantages. 

6. Regular savings account—If you’re not sure your child will go to college, you might want to choose a regular savings account. While these don’t have the same tax advantages as a 529 plan or Coverdell ESA, they also don’t have restrictions on how the money can be used.

The best savings option depends on your family’s individual circumstances, goals and financial situation. Before making decisions, it’s always a good idea to consult with your financial advisor for more information. 

Remember, it’s never too early—and not too late—to start saving for college. Even small, regular contributions can add up over time...and can help to reduce the stress and worry of paying for college, for both you and your children.