Jan 18

6 strategies for increasing your child’s college fund

It is on almost every parent’s mind: “How will I pay for my child’s college education?”

College tuition is rising indefinitely and at least one trillion dollars in national student loan debt has accrued.  Many parents will see this as a catch twenty-two—your child needs a college education in order to earn a living, yet your child will barely afford a living for at least a decade as they start paying off their loan.  You are not alone.

Because so many parents are asking the same questions as you, there are now many resources that will aid you in finding the best and most efficient way to help your child pay for their education fund.  Below are six strategies for increasing your child’s college fund.


Prepaid College Tuition Plan

This is a plan best started early on.  The Prepaid College Tuition Plan permits you to pay for portions of your child’s college tuition immediately.  The bonus of this plan is that it will lock in the current tuition prices, which will protect you and your child from the inevitable tuition hikes that will come in years down the road.  For example, if you pay for fifty percent of your student’s college fun upfront, as the tuition rises, your contribution will still be matched at fifty percent.

Several states participate in this measure, although some are closed to enrollment due to the financial pitfalls of the recession.  Some states, however, will only guarantee their plans’ solvency, by issuing state-backed bonds.  The one caveat is that most of these states will only allow the student to attend the college in their own state.  This is not true of every state who participates, so be sure to look up your state of residence to see if you qualify.


529 College Plan

The 529 College Plan—also known as Qualified Tuition programs—are offered in over thirty states.  You will usually invest money into the plan and you are then allowed to withdraw the funds for qualifying education expenses.  Most will invest after-tax money, so that they can withdraw funds and investment gains tax-free.  Each state will have different requirements including annual fees, operating costs, and investment options.  The limits to what you contribute are usually high as well.


Coverdell Education Savings Account

This option is similar in many ways to the plan above, however this plan can also be used for private school tuition and other educational expenses.  Unlike the 529 College Plan, there are some limits, including that you may only invest $2,000 a year per child, and couples above a certain income will not be eligible.


Roth IRA

While people usually reserve their investments in their Roth IRA to finance their retirement, it can also be used to help fund for college tuition.  Just as with the 529 College Plan, you will contribute money that is left after taxes, and any money withdrawn will be tax-free.

In order to withdraw without penalty, you will usually have to withdraw around the age of sixty.  The money from your Roth IRA will often be taken out tax free for appropriate educational expenses after five years—whose specifics are outlined in your Roth IRA Plan.  There are certain limitations to consider, such as the income and contribution limits.  Use a tax service such as Community Tax to discuss with you how you can appropriately use your Roth IRA.


UGMA and UTMA Custodial Accounts

This is a plan that sets up your child’s asset, and will directly affect the amount of federal aid your child qualifies for when he or she files for FAFSA.  The money is entirely their own to do with as they wish.


Get Out of Debt

If you’re in debt with different creditors, focus your efforts on paying off these accounts before committing fully to college savings contributions. You’ll likely need to employ the help of a financial advisor or tax professional. While credit card debt can be scary, owing money to the United States’ government can be a whole lot worse.  From jail time to the loss of your house, car, and other possessions, the IRS doesn’t take kindly to those who avoid paying their taxes. There are plenty of options to consider, including installment agreements, offers in compromise, and even debt forgiveness.

The earlier you get started on saving for your child’s college career, the better off they’ll be. Employ these strategies today and set your little one up for success.


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