September 15th, 2020
Paying for your Child's College Education
As many people will tell you, having a child is one of the greatest gifts in life. Like most good things, this comes much more responsibility, especially in regards to managing your finances. Children are a large and expensive investment, from the everyday costs of clothing, food, and entertainment to larger ones such as healthcare, housing, and education. You need a strong college plan.
As your child grows up, there is constant talk about their future, a large part of which revolves around college. A college education is only becoming more necessary in the professional world and accordingly more expensive. This causes obvious concern among parents about how to pay for such a large and important part of your child's future.
Luckily, there are ways you can save and allow your money to grow for future education expenses. Two of the more common options are state sponsored prepaid plans and 529 savings accounts.
Quite simply, a prepaid tuition plan locks you in at today’s prices, which we presume are lower. While these plans generally only cover tuition, they sometimes have options for room and board costs as well. Additionally, this tuition can only be used at the sponsoring state’s eligible colleges or partial payment to out of state or private colleges. As a whole, this plan can be beneficial if you think it is likely your child will stay in state. Even if they go out of state, these plans can still be a good option. Just make sure your state plan allows for out of state use.
A 529 plan is similar to an IRA or 401K. Your money will go into an investment account that grows tax-deferred then can be withdrawn tax-free, if used for qualifying education expenses. You can use the money to pay for tuition and fees, room and board, and even funding of K-12 education. Additionally, it lacks the residency restrictions of the prepaid plan and the money can be used for any college in any state. One of the greatest benefits of this plan is that the money can be used for all of your children. For example, you may live in California, with one child currently attending college in Texas and another planning to attend college in Arizona. With a 529 plan, you are able to simultaneously live in California, have one child in college in Texas, and contribute to the other’s future college tuition in Arizona. Also, if you have leftover money from the account for your child currently in Texas, this money can be rolled over and used for the younger child’s future costs of attending school in Arizona.
Whichever plan you choose, it is always best to open up and begin contributing to an education savings account when your child is born to allow for maximum time for investment growth.