How to Start Saving for College
If you’re a parent, it’s never too soon to start thinking about your child’s college education. College can be expensive, so saving now is a great way to set your child up for success in the future. Let’s explore some questions you and other parents may have about saving for college.
Is it too late to save for college?
It’s never too late to start saving for college—even a small amount of savings can help make college more affordable. There are many different savings options depending on your family’s needs. Read on to learn more.
Is it too early to save for college?
It’s never too early to save for college. Starting a college savings plan early in your child’s life is a great way to plan for their future and gives you more time to save.
What are college savings plans?
College savings plans are investment accounts that help you save money for your child or children’s college costs. These accounts give you different options to save and invest your money to grow the balance over time, with certain tax advantages when used for qualified educational expenses. Two common college savings plan options are the 529 plan and the education savings account (ESA).
What is a 529 plan?
529 plans, one of the most common college savings plans, offer many different savings options depending on the needs of the student and their family. Each U.S. state offers its own unique 529 plan, but you don’t have to invest in your state’s plan— you can shop around and open an account with any state plan that’s right for you. There are no age or time restrictions on 529 plans, and your savings can be spent tax-free as long as they’re used for qualified higher education expenses (such as tuition and fees, housing, meal plans, books and supplies, and more).
Certain states also offer a 529 plan that lets students and families prepay for college at current tuition rates, even if the student beneficiary won’t be enrolled in college for many years. This can equal significant savings, since college costs increase every year. Prepaid tuition plans normally don’t cover housing and meal plans, and usually limit where a student can enroll.
You can usually apply for a 529 plan online with some basic information about the student beneficiary. Most don’t require a large sum of money to start. In fact, many only require an initial investment of $25.
What is an education savings account?
Education savings accounts (also known as Coverdell accounts) allow the account holder to save up to $2,000 a year, while also earning extra money—interest—on the amount they have saved. Any U.S. citizen or resident can open one, for any child under the age of 18. Due to the age limit on this type of college savings account, it may be more beneficial for parents of students who still have several years to go before enrolling in college.
In addition to earning interest over time, there are no taxes on the funds saved if they’re used for qualified educational expenses. Banks, brokerage firms, and mutual fund providers all offer Coverdell accounts.
How do I use a traditional savings account to save for college?
If you’d like to save money for college without limiting access to your funds, a traditional savings account could be a good option for your family.
Many banks and savings apps let you automatically transfer money from your checking account to your savings account, which can make saving for college with a traditional savings account even easier.
Is saving for your child’s college education worth it?
The benefits of saving for college outweigh the effect on your expected family contribution (EFC), a calculation of financial need colleges use to award students financial aid. While the amount of your family’s savings affects your expected family contribution, it plays only a small role in the calculation of your financial aid eligibility. For most students and families, savings has only a small impact on their expected family contribution.
See the following table for an example of how savings affect a student’s EFC.
For example, a family of four with one child going to college, with an annual income of $60,000 and just $2,000 in savings, would have an EFC of $3,033. This would make the student eligible for a Pell Grant of $3,845. If the same family had $30,000 in savings (instead of just $2,000), the student’s EFC would only increase to $3,693, and they would still be eligible for a Pell Grant of $3,245.
|$60,000||$2,000||$3,033||$3,845||A $28,000 difference in savings is only a $660 difference in EFC.
With college costs increasing every year, saving even a small amount of money for college can be beneficial. No matter when you start or how much you’re able to save, it all adds up. Use the BigFuture EFC Calculator to see how savings may affect your EFC and why saving for college is worth it.
While most saving options, including those mentioned in this article, are parent-focused, students can also save for college. If you’re a student who works, you can set aside some of your earnings to help with your tuition or other college costs. The earlier you start saving the more money you’ll have to help pay for college.
How do I open a traditional savings account?
As we said before, traditional savings accounts are a great way to save for college while still having access to your funds. They’re especially good for students, helping you set aside money from work or gifts with the intention of using it for school.
You can open a savings account online or in person at a bank or credit union with some basic information about yourself. Take the time to shop around, as there are many savings accounts offering different interest rates, minimum balance requirements, and varying levels of fees. When you’re ready to open one, be sure to have your Social Security number or an Individual Taxpayer Identification Number (ITIN), two forms of identification, and proof of address (such as a piece of mail showing your name and address).
Should I save money from work to pay for college?
Whether you have a part-time job during school or a summer job, any money you earn can help cover the cost of college. Look at your budget and consider if it’s possible to save some of your money. Saving even a small amount from your paycheck every week can help you cover some college-related expenses.
Whether you’re a parent or a student, saving for college is an important part of preparing for college success. Explore the options to decide what’s best for you, and remember: the earlier you start saving the more money you’ll have to help cover college costs.