5 Smart Ways to Save for Higher Education

Whether you are raising young children, helping grandchildren, or simply thinking ahead for someone you love, the cost of higher education is one of those things that we need to plan for. A four-year degree represents a significant financial commitment. Like many planning topics, the earlier we start talking about it, the more choices we tend to have.

Scholarships can certainly help, and there is a lot of money awarded each year through grants and scholarship programs. That is good news. But for many families, it still does not cover the full bill. Tuition, room, board, and the many other pieces that come with college planning can add up in a hurry. 

Tuition Growth Has Slowed in Recent Years
There is some good news in that tuition inflation has slowed in recent years. We will take that. Still, colleges and trade schools remain expensive, and for those who remember what tuition looked like years ago, the difference can feel pretty remarkable. As with most financial planning topics, the key is not to panic, but to understand the options and build a plan that fits. 

Early Planning Compounds Success 
Early planning matters. Starting when a child or grandchild is born gives compounding more time to work. For example, saving $250 per month for 18 years at 6% estimated growth annually adds up to about $97,000. Waiting until age 9 results in about $35,700 by age 18. The takeaway is simple: more time can make a meaningful difference. But even a later start can still help offset future costs. 

5 Education Savings Strategies 

There are several ways to save for higher education, and each has its own purpose, flexibility, and tax considerations. None of them are perfect for every situation, but each may have a place depending on the family, the child, the timing, and the overall plan. Here are 5 of the common tools we tend to discuss: 

529 plans are state-sponsored, tax-advantaged accounts designed specifically for education savings. They can be a powerful tool when used appropriately, with tax-free growth and tax-free withdrawals for qualified education expenses. State tax benefits may also apply to contributions, although rules vary by state. For 529 withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and a 10% federal income tax penalty.

Coverdell Education Savings Accounts (ESAs) can also provide tax-free growth, along with more investment flexibility than many 529 plans. They may be used for certain college, elementary, and secondary education expenses. The tradeoff is that contribution limits are lower and income eligibility rules apply.  

UGMA/UTMA accounts allow an adult to save or invest for a child through a custodial account. They offer flexibility, but the assets become the child’s property at the age set by state law. That can be exactly right in some cases, and something to think carefully about in others.  

A traditional savings account keeps things simple and flexible. The downside is that it does not offer special tax advantages. There is a risk that educational savings accounts may not perform well enough to cover the cost of college as anticipated.

A Roth IRA may offer some flexibility because contributions can generally be withdrawn tax- and penalty-free. You may take nontaxable withdrawals from a Roth IRA if you are at least 59 ½ and the account has been held at least 5 years. Otherwise, earnings withdrawn may be subject to ordinary income tax and a 10% penalty. Retirement planning comes first, and education planning should not accidentally pull a long-term retirement strategy off course.

Here is the bottom line. Saving for education is not a one-size-fits-all discussion. It is about matching the right tool with the right intention, and then staying consistent. If this is something on your mind, we would be happy to talk through the options and how they may fit into your overall plan.

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