College in the U.S. can get extremely expensive, and it might even saddle you and your kids with an excruciating amount of debt. The bigger head start you can get on this, the lighter the burden could be on your family in the long term. Here are some tips that can help.
1. Start Saving Now
The first thing you should do to get a head start on funding your child's college education is to start saving as soon as possible. Set up a savings account specifically for this purpose, and contribute to it regularly. If there are times when you have a little extra money, put it in this account rather than spending it elsewhere.
You can go a step further and find existing expenses to eliminate or reduce and put the money you save into the college savings account.
2. Apply for Scholarships
When your child is in high school, start exploring different scholarship options. There are many types out there, and they can make a major difference when it comes to paying for college. In addition to scholarships based on academic excellence or athletic ability, there are scholarships for students in music and the arts, community service scholarships, and those based strictly on financial need. If you search the internet for "unusual scholarships," you'll also find lots of other unique opportunities: funds for women and minorities, members of specific ethnic groups or religions, etc. Explore and apply!
3. 529 plans
A 529 Plan is a college savings plan that comes with tax benefits. These plans grow tax-free while earning interest, and withdrawals made for college expenses are tax-free.
Plans vary by state. In Nevada, there are different payment and savings options available, and each one includes a prepaid tuition option. The Nevada State Treasurer website has information on the following options:1
- SSgA Upromise 529
- Plan Vanguard 529
- Plan USAA 529
- Plan Putnam 529 for America
- Wealthfront 529 Plan
4. Prepaid Tuition Plans
Prepaid tuition plans let you pay for your child's education in a state school in the future. That means you can avoid rising tuition rates by locking in a current one. As long as you have a child, it's never too early to take advantage of one of these if you can afford to pay in advance. As mentioned, each of the 529 plans includes this option.
5. Coverdell Education Savings Account
Formerly known as a Coverdell IRA, a Coverdell ESA2 can be another option for funding your child's college education.
As Deborah Fowles at The Balance explains, "While contributions to a Coverdell ESA are not tax-deductible (meaning you must pay taxes on the money now), the account's value will grow tax-free and distributions from the account are tax-free when used for qualified education expenses for the designated beneficiary. The primary downside to Coverdell ESAs is that there is a low limit of $2,000 on annual contributions and families with an adjusted gross income (AGI) above the limit cannot participate."3
It's worth noting that you can no longer contribute to the plan once your child turns 18, so contribute as much as you can while you can. Additionally, the ESA funds must be used before the child turns 30, so they should not delay going to college for too long.
6. Roth IRA
Another option is a Roth IRA.2 Generally, these are used as retirement funds, but don't discount the idea of using one for a college fund. Contributions to Roth IRAs are made from earned income that has already been taxed. So, while you can't deduct contributions from your taxes, any withdrawals (up to the total of your contributions) are free from federal income tax
"Many families use money from a Roth IRA to pay for at least a portion of their children’s college expenses," writes Tim Parker at Investopedia. "The real magic of the Roth IRA happens if you waited until later in life to have kids or you’re saving for grandkids. Once you reach 59½ (and it's been at least five years since you first contributed to a Roth) all of your withdrawals—earnings as well as contributions—are tax-free. That means 100% of your withdrawals can go to college expenses."4
7. Personal Loan
A personal loan is also an option you can explore to simplify your finances in general. You can consolidate higher interest debts into one lower-interest monthly payment. This may be used as you see fit, freeing up finances to put toward student loans or paying off existing student loan debt. Take a look at Nevada State Bank's personal loan options* here.
Figuring out how to pay for your child's college education can be daunting. It’s good to know that there are quite a few options available to make things easier on your family and help get your child the education they need for a brighter future.
1. http://www.nevadatreasurer.gov/CollegeSavings/CSP_Home/
2. Consult your tax advisor for deductibility and tax savings information.
3. https://www.thebalance.com/how-to-finance-your-child-s-college-education-1289244
4. https://www.investopedia.com/529-plan-vs-roth-ira-for-college-4771260
*Loans subject to credit approval. Terms and conditions apply. See banker for details.