If you’re a new parent or your kids are young, start putting money into a college savings plan. Having a college fund for kids is a surefire way to help transition your children to higher education.
And college, as we all know, isn’t cheap.
According to a U.S. News annual survey, the average tuition for the 2024-2025 school year ranged from $43,505 (for private colleges) to $11,011 (for public, in-state colleges). And unless something changes, these costs will only keep rising.
If you’re looking for ways to save for college, here are eight options:
1. Open a 529 Plan
One of the best and most popular ways to establish a college fund for kids is to open a 529 plan. The plans, sponsored by state governments, encourage saving for future education costs. They often are tax-friendly in the sense that many states will let you deduct your contributions from your state income tax, and when you withdraw the money for college expenses, it won’t be taxed.
It often doesn’t require much money to get started: Many 529s allow you to open accounts for as little as $25.
The important thing is to keep contributing money to your child’s 529 on a consistent basis. Otherwise, the interest on that $25 isn’t going to amount to all that much over the next 18 years.
A common mistake that parents make is setting up the 529 and then forgetting to fund it, says Steve Azoury, owner of Azoury Financial in Troy, Michigan.
“It’s best to schedule a systematic deposit each month into the plan so it doesn’t get away from you. You should also notify your family members about the plan, so when it comes to birthdays and Christmas gifts, they can consider making deposits into it,” Azoury says.
Andrew Wood, a retirement planning advisor with Dan White & Associates in Middletown, Delaware, says too many parents tend to procrastinate when it comes to opening a 529 plan.
“With education costs continuing to climb, the time value investing is vital,” he says. “The most valuable dollar invested is the first dollar invested, with time and compounded interest. Don’t wait until it’s too late.”
But Wood says that “time is also important on the back end.”
When your kids are reaching college age, make sure your 529 is set up properly, he says. You don’t want to be close to the finish line when you need to use the money to pay for college, then lose a lot of your investment due to a bad day in the stock market.
“Make sure you are revisiting risk tolerance within the plan the closer you get to using the funds for education expenses. If you’ll need the funds soon, you’ll likely want to consider scaling back on the risk,” Wood says.
2. Put Money Into Eligible Savings Bonds
You can buy savings bonds online from the U.S. Department of the Treasury at TreasuryDirect.gov. They’re no longer issued in paper form.
“If you redeem them and use the money to pay for higher education, excluding room and board, you can exclude the income from your annual gross income for tax purposes,” says Ryan Eyerman, a certified financial planner at E&M Consulting in Westlake, Ohio.
“This is, of course, subject to certain restrictions,” he adds.
Savings bonds are guaranteed by the government and offer low to no risk.
On the downside, the interest you’ll earn can be pretty low. Currently, individual Series EE savings bonds are earning an annual fixed rate of 2.70%. Series I savings bonds are currently earning a composite rate of 4.28%, a portion of which is indexed to inflation every six months.
[READ: Budget Breakdown: How College Students Spend Their Money]
3. Try a Coverdell Education Savings Account
A Coverdell Education Savings Account, known as an ESA, is “a tax-deferred trust account that can be used to pay for elementary, secondary and higher education expenses — room and board is permitted,” Eyerman says.
“Earnings accumulate tax-free, and distributions are free of income taxes as long as the funds are used for educational purposes,” he adds. “All funds must be used by age 30, however, or there may be tax penalties.”
There are other important considerations, however.
You can’t put more than $2,000 a year into a Coverdell ESA, but they’re available only for families below a certain income level.
Currently, the requirements are an adjusted gross income of $95,000 or less for single taxpayers and $190,000 or less for married taxpayers who file jointly. If you make more than that, the limits are up to $110,000 for single filers or $220,000 for married couples.
4. Start a Roth IRA
Typically a Roth IRA is for retirement, but it doesn’t have to be, according to Laurence Namdar, a tax and financial consultant at Asher Levi Financial in Daytona Beach, Florida.
“A Roth IRA is an excellent vehicle for many taxpayers to invest after-tax dollars while shielding earnings and future growth from taxes forever, as long as appropriate distributions are made,” Namdar says.
As with any investment, consider the pros and cons carefully — for instance, other relatives can contribute to a 529 for your child but not to a Roth IRA.
[Looking for an Advisor? Find a Financial Advisor in Your Area Today. ]
But one big selling point, Namdar says, is that “With a Roth IRA, should a child decide not to attend college, the parents already have those funds invested for their retirement.”
5. Put Money Into a Custodial Account
Custodial accounts are savings accounts that come in two varieties: UGMAs and UTMAs (Uniform Gift to Minors Act and Uniform Transfers to Minors Act). They hold virtually the same assets, such as cash, stocks and mutual funds, but UTMAs can also hold physical assets like real estate.
There’s no limit on how much money you can put into a UGMA or UTMA, though there may be gift tax consequences for contributions above the $18,000 annual gift tax exclusion for 2024. These accounts are best for a child whom you believe is responsible. They will legally be able to use the money in the account — for college or anything else — when they turn 18.
6. Invest in Mutual Funds
There’s no limit on what you can invest in mutual funds, and of course, the money doesn’t have to go toward college. But what you earn will be subject to capital gains taxes. Plus, the value of these investments can reduce financial aid eligibility for your child.
7. Take Out a Permanent Life Insurance Policy
This is a strategy typically used by high-net-worth families to provide tax-advantaged savings for multiple goals, including higher education, according to Bryan Bentley, a financial advisor with Talon Wealth Management in Roseville, California.
With a permanent life insurance policy some of the money from your premium goes toward the death benefit and some goes into a tax-deferred savings account.
One of the advantages of this type of life insurance policy, Bentley says, is that the money you save “can be accessed at any time for any reason, so it’s not limited to college expenses. It provides additional benefits such as a death benefit, and other living benefits, and there is no adverse impact if it is not used for education expenses.”
He adds that the life insurance policy doesn’t count as an asset when you’re applying for financial aid.
Rafael Rubio, president of Stable Retirement Planners in Southfield, Michigan, agrees that using permanent life insurance to fund a child’s college education could work for some families.
“Life insurance gives you more flexibility than 529 savings plans,” he says.
Still, there are downsides, he adds.
“The fees inside the policy can eat away the earnings, and it could take a long time for that cash value to surpass the premiums you pay,” Rubio says.
“Also, some life insurance policies are reliant on the market indexes to perform. A bad run of market returns can doom the intended use of the life insurance policy, much like a 529 plan,” he says.
8. Take Out a Home Equity Loan
Taking out a home equity loan to pay for your child’s education sounds risky, and it can be. It may also work out well.
“This is a common approach, whether intentional or not,” Bentley says.
“The equity in a family’s home is often their largest asset, so it is often used to cover college costs,” he says.
“Some families will choose to pay down a mortgage instead of creating a separate college savings plan with the intention of tapping the equity if financial aid or scholarships do not materialize,” he adds.
[Read: Should You Pay Off Your Mortgage Before You Retire?]
As a college fund for kids, it’s not really the best option — especially if you still have years in which you could be saving money for future education costs. But if you haven’t saved enough and are looking for cash flow, it may be worth considering.
More from U.S. News
What Students Can Use Scholarship Money For
5 Ways to Get a Tuition Discount
How to Create a Saving Strategy
How to Save for Your Child’s College Education: 8 Options originally appeared on usnews.com
Update 10/10/24: This story was published at an earlier date and has been updated with new information.
