One of the realities of life is that college costs more and more. The rise of student loans to pay for college has made college “affordable” for more people, and has facilitated an education bubble that allows the cost of tuition to keep rising. While you may need some student loans to help supplement an education, it can help to start saving money for college to reduce how much you end up borrowing. If you believe that a college education still has value, and if you want your child to be involved in higher education, you need to prepare now for the expense.
Open a College Savings Account
When it comes to saving money, it is important to start as early as you can so that you have the benefit of compound interest working on your behalf for as long as possible. There are, fortunately, some tools that you can use to help you maximize your efforts at building up college savings.
Tax advantaged college savings accounts like the Coverdell ESA and the 529 Plan allow money used for qualified education expenses to grow tax free. Additionally, some states will even give you a tax break for your contributions (there is no federal tax break on contributions). This can be a real motivation to help get college savings off the ground.
With some of these accounts, you can choose from investments that will help you reach your college savings goals. You can invest in different funds, or take advantage of other opportunities. There are even target date funds that can switch your asset allocation as your child approaches high school graduation.
Warning about Saving for College with Investments
It’s important to remember that there are risks associated with saving for college using investments. There is always the risk of loss. Additionally, it can be especially devastating should a market crash come just before you need to withdraw the money. So be careful about which investments you use, and consider your options.
Also, realize that all investments come with fees. You will have fund fees to pay, and you might have transaction fees to pay. Look for low fee funds that are more likely to meet your needs, and prevent you from seeing your gains eroded by expenses.
You should also be careful of the plan you choose. Some plans restrict which schools your child can attend. Sometimes your child can only go in certain states, or some schools will be excluded. Before you start any college savings plan, make sure you understand what you are getting into.