Saving for college is a major financial focus for many families. With rising tuition costs and the unpredictable nature of financial aid, planning effectively can help the process and expense feel more manageable. Here are five strategies you might consider when saving for college.
1. Start Early and Save Consistently
Starting early allows you to benefit from compound interest, meaning your investments earn interest on both the initial principal and accumulated interest from previous periods. The earlier you start saving, the more you can leverage this tool to grow your college fund. To determine how much you need to save, consider the type of college (public vs. private), location, and duration of the program. You can use online college savings calculators to estimate the total amount needed and establish a target monthly savings amount. Then, set up automatic transfers from your checking account to your college savings fund.
2. Choose the Right Savings Vehicle
There are several savings vehicles that can help you with the college savings process, each with its own advantages and tax benefits.
- 529 College Savings Plans - 529 plans are specifically intended for education savings and expenses. Earnings grow tax-free, and withdrawals used for qualified education expenses are also tax-free. Some states allow a tax deduction up to certain contribution limits the year the contribution is made. If your child doesn’t attend college, you can transfer the account to another family member. And if the beneficiary receives a scholarship, a withdrawal up to the full scholarship award can be made without incurring a penalty.
- Taxable Brokerage Accounts - The funds in a brokerage account can be used for anything. Due to this flexibility, there are not as many tax benefits to the account compared to a 529 plan. Ordinary income tax is due from dividends, and interest and capital gains tax are applied when a position is sold at a gain. If you are starting to save for college later in your child’s life and unsure how much you can afford, this may be an appropriate savings option.
- Custodial Accounts (UGMA/UTMA) - These funds can be used for any purpose that benefits the child, not just education expenses. Earnings may be subject to taxes, and these assets may impact your child’s eligibility for financial aid. Once the child reaches legal age, they gain control over the account, so if you want to start an investment account specifically designated for your child, these accounts may be a good solution.
- High-Yield Savings Accounts or CDs - These savings vehicles provide a safe place to store your savings with guaranteed returns. While they offer security, the long-term returns are generally lower compared to investments like stocks or mutual funds. These options are generally a better fit for education expenses when you plan on using the funds saved in the near term.
3. Evaluate and Adjust Regularly
Regularly review your savings plan and investment selection and adjust as needed in order to remain on track with the savings goals you set. Be prepared to adjust your savings strategy based on changes in your financial situation, changes in college costs, or changes in your child's educational goals.
4. Utilize Financial Aid and Scholarships
Encourage your child to complete the Free Application for Federal Student Aid (FAFSA) as early as possible. The FAFSA determines eligibility for federal financial aid, including grants, work-study programs, and federal student loans. At the same time, research and apply for scholarships and grants, including from private organizations, community groups, and academic institutions. Unlike loans, scholarships and grants generally do not require repayment. These can significantly reduce the amount needed from savings, so the more your child can secure, the better.
5. Educate Your Child About Financial Responsibility
Your child should understand the costs associated with college and the importance of budgeting and managing money. This financial awareness will help your child feel a greater sense of responsibility for their educational journey and accomplishments. The responsibility for researching and applying for scholarships and financial aid should be just as much on them and will teach them valuable skills about financial responsibility and planning.
Saving for college requires planning and discipline, but with the right strategies, you can find the approach that is right for your family. Starting early is key, along with choosing appropriate savings vehicles, utilizing financial aid and scholarships, and regularly monitoring your progress. With thoughtful preparation, you can help pave the way for your child’s higher education while maintaining your family’s financial well-being.
The opinions and analyses expressed in this newsletter are based on Curi RMB Capital, LLC’s (“Curi RMB”) research and professional experience are expressed as of the date of our mailing of this newsletter. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. Curi RMB makes no warranty or representation, express or implied, nor does Curi RMB accept any liability, with respect to the information and data set forth herein, and Curi RMB specifically disclaims any duty to update any of the information and data contained in this newsletter. The information and data in this newsletter does not constitute legal, tax, accounting, investment or other professional advice. Returns are presented net of fees. An investment cannot be made directly in an index. The index data assumes reinvestment of all income and does not bear fees, taxes, or transaction costs. The investment strategy and types of securities held by the comparison index may be substantially different from the investment strategy and types of securities held by your account. RMB Asset Management is a division of Curi RMB Capital.
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