Planning Your Child's Success: Managing a College Fund

With the national student loan debt totaling over $1.4 trillion (that’s about $17,000 per graduate), creating a college fund is more important than ever before.

Investing in your child’s higher education is one of the greatest gifts you can provide as a parent. However, the climbing tuition rates may have you feeling concerned about how you can afford higher education.

With the right tips in mind, you can ensure your child will get his or her degree — without breaking the bank.

Let’s get into the most important tips!

Know the College Fund Options

There are several different college fund options available to help pay for qualified higher education expenses.

The most common ones include:

529 college savings plans
Uniform Gifts to Minors/Uniform Transfers to Minors Accounts (UGMA/UTMA)
Coverdell Education Savings Accounts

529 College Plans

Similar to a Roth IRA, These tax-deferred plans allow parents to save for a child’s education expenses through a variety of investment options.

The money in these accounts can be used for both undergraduate or graduate studies at any accredited campus. They can be used to pay for tuition, books, supplies, course fees, and room and board.

The savings belong to the parent and not the child. That means the parent is the account owner, and the parent can change the beneficiary if needed.

Each state offers different tax breaks or credits to residents, so it’s important to shop around for the best rates.

You can also look into a 529 prepaid tuition plan, which acts as a “locked-in” college fund. You’ll be paying in advance for a university in “today’s dollars.”

The pros of 529 plans include tax-free growth, beneficiary flexibility, and high contribution rates. The major con, however, is that the money is ONLY available for educational expenses. If your child ends up not going to college or receives a scholarship, you may have to pay a 10% penalty fee to access the funds.

UGMA/UTMA Custodial Accounts

These are custodial accounts meant to hold and protect assets for minors. They allow for stock, bond, and mutual fund investments, and these assets belong to the minor.

Once the minor reaches age 18-21 (depending on the state), he or she has full access to the assets.

Of course, this can be a good thing or a bad thing. These accounts are not exclusively for college, so children can use the money without limitations once they are of legal age to do so.

These accounts do not come with any contribution limits, so it is helpful to consult with a financial planner about tax implications if you choose to go this route.

Coverdell Education Savings Accounts

These college funds are somewhat similar to 529 plans, in the sense that withdrawals are tax-free, and you can invest in many different funds.

However, contributions are limited to $2,000 per year, and only until the beneficiary turns 18.

Qualified expenses include educational purchases from K-12 and throughout graduate school.

Start Early

The best advice for maximizing your child’s college fund? It’s the same advice as maximizing any investment option. Start as early as you possibly can.

Everyone knows that compound interest is a beautiful concept. In fact, math continues to show that the earlier you start funding the account, the bigger your return will be.

The longer you have for your money to grow, the greater the chances of it actually growing!

Don’t get so hung up on the amount of savings, either. Even socking away $100 every month when your child is a newborn can make a huge difference when it comes time for college applications.

Maximize High School

Even though college tuition prices continue to climb, there are more ways to subsidize your child’s college fund than ever before.

More and more high school campuses are offering advanced placement classes and exams. These courses allow students to earn college credit while still in high school.

By nature, they are rigorous and often demand more time and attention than the standard high school curriculum. Successfully passing the exams, however, can “count” as college credits in undergraduate studies.

Some students even sweeten the college deal further by looking into local community college classes. With more schools offering online or hybrid courses, signing up for these extra units is simple and affordable.

Furthermore, these credits can transfer and apply to an undergraduate degree, depending on the student’s intended course of study.

Balancing dual enrollment can be challenging, and both students and parents alike should know the potential risk factors (burnout, academic stress) that could arise.

Consider Scholarship Opportunities

Scholarships are the icing on any college fund cake.

There are literally millions of scholarships available to high school students for aiding college. The scholarship options are endless; criteria can be anything from having top grades to being able to write an essay about being a vegetarian.

The general rule of thumb: apply as early as possible and for as many as possible!

Typically, students can start applying for scholarships at the beginning of their high school years (around age 13-14) and can accumulate funds throughout college.

Start your search with free scholarship websites. Also, don’t forget to check with your employer, as many companies offer scholarship programs for employees and their dependents.

And, don’t automatically discount scholarships with smaller award amounts. Typically, these generate less competition, which means your child will have a greater chance of actually obtaining it!

Research Community College & State Programs

You can save a ton of money if your child decides to opt for community college or in-state programs.

Even if your little one has grandiose plans of attending his or her “dream school,” even dreams can sometimes be revised (without being totally changed). Some students want to go to a popular university, but, for various reasons, that may not be possible.

Starting at a community college or local, in-state school can help students solidify their college major and career plans. It can also help them save for the inevitable financial costs that a university will bring (like room and board).

Furthermore, most of these schools have a similar caliber of professors as “dream” schools, with the majority of teachers having PhDs in their respective fields of study.

Don’t Forget Alternative Options

Here’s the truth: some kids won’t go to college. Some kids don’t need to go to college. And, both of those are okay.

As a parent, you want what’s best for your kid, and that means supporting the choices that are actually best for him or her!

With that said, if college isn’t in the plans, that doesn’t mean all hope is lost. Many young adults find success in the following paths:

Starting a business
Getting into a trade (yes, you can use those 529 dollars)
Joining the military
Working full-time (and climbing the ladder)
Pursuing creative talents

Research Different Aids and Loans

Even after all the best frugal hacks, saving, planning for your child’s college fund, you still may need to consider different aid and loan options.

Financial aid can come from:

the U.S Federal Government
your home state
your college
nonprofit or private organizations

In general, federal student aid will include:

Grants — aid that does not have to be repaid
Loans — borrowed money that you must repay with interest
Work-study — a work program where you work to earn money to pay for school

Grants

They are considered the most optimal form of aid, as they do not require any repayment. Typically, however, they are reserved for individuals who actually meet a qualified financial need. Students should apply using a FAFSA form every year to determine how much they are eligible to receive.

Grants must be repaid if you withdrew early or your enrollment status changed (i.e: you went from full-time to part-time).

Loans

If a student receives federal student loans, the government is paying the tuition. If a student receives private student loans, the loans are made by a lender, such as a bank or a school.

Typically, it’s best to start by applying for federal student loans. They come with fixed interest rates and income-driven repayment plans. These perks are not usually offered in private loans.

Private loans may not qualify for being tax-deductible, and you also may need a cosigner to approve for the funding. They also do not offer deferment or loan forgiveness options.

As a result, private loans tend to cost more than federal loans, especially when it comes to interest rates.