5 Ways to Save for College

With the cost of college tuition on the rise, it is important as parents and students to begin saving for college as soon as possible.  There are many ways to save for college, and it is certainly not a one size fits all deal. What works best for you will depend on you, where you are at in the process, and even where you live.  I am going to give you some of the best ways to save for college, along with pros and cons, to help you decide which is best for you.  Or maybe you decide to choose a couple options, that might work best you! Make sure you are setting your children up for success … and less stress!

According to the Wall Street Journal, the average college graduate’s student loan debt is at $37,172.  That’s just the average! The most recent data from the Federal Reserve Bank of New York shows the overall student loan debt in America hovering just over $1.3 trillion.  Trillion!

Whether you are pregnant with your first child, or have kids in middle school, the most important piece of advice I can give you on saving for college is to START.  We all know, the sooner you start the better your options are, but that shouldn’t discourage anyone from starting at any point. Another misconception people have is that you cannot save for retirement and your kid’s education … WRONG!  It is possible, and smart, to give yourself options to save for both.

Ways to Save

1. Money Markets

Money Markets are basically a glorified checking account.  Think of it as a parking lot for your money.  The difference between a money market account and your typical savings or checking account is there is usually a higher interest rate.

Pros: your money is liquid, easy to access, and earns more than it will sitting under your mattress.

Cons: not nearly as much growth as the other options I’m going to give you.

2. A 529 Plan

This is a very popular college savings plan, you may have heard of it before.  The benefits and restrictions vary slightly depending on the state your plan is in, so it’s important to look into this when choosing this option.  This plan is similar to many tax free investment plans with no tax deduction benefits.  However, when you access the funds for the appropriate reasons, they are tax free!

Pros: tax free aspects and more substantial growth potential

Cons: penalties for not using for education (say your child get a scholarship or decides not to go to college), they are mutual funds and stock driven so there is some risk, restrictions on use (books and tuition ok, travel and food may not be), and early withdrawal fees.

3. A 7702 Plan (my personal favorite)

7702 is the tax code that associates tax free compound interest through the living benefits of a permanent life policy.  Essentially this is a life insurance policy, that has a flexible use aspect, such as college tuition.  Personally, this is what I found fits best for me and my concerns.

Pros: high growth, little risk. Great flexibility, can take out loans against and replace if wanted.  Insured against disability, meaning if you become disabled and can’t pay the premium, your premium could be paid for you until the end of the term.  Can be fully vested in a compact period of time, 10 15 and 20 year terms available.

Cons: this was hard for me to come up with, but there are some downsides. A portion of what you’re paying for is a death benefit.  The interest rate returns are slightly lower than a 529 plan, but no by much.

4. CDs or Certificate of Deposit

These are also very popular, specially as gifts from grandparents … at least they used to be.  This is similar to a savings account, but have a guaranteed return when money is “locked” for an agreed amount of time. The longer the agreed upon time is, the higher the return.

Pros: can be laddered, meaning you can schedule payouts.  Rates change, if you get locked in at a great rate, it doesn’t matter if they drop later, you are locked in! This can also be a con.

Cons: you will be taxed on the growth of your CDs, timing is of the essence here, and you may be locked in at a junk rate for the entire term, even if rates go up.

5. ESA: Education Savings Account or Education IRA

Similar to a traditional savings account, but has a higher rate of return and tax free growth.  This type of account allows you to save up to $2,00 a year per child.  There are some restrictions which makes this ideal for some who have a long time to save, not so much for those with a late start.

Pros: grows tax free, higher return than the average savings account

Cons: annual contribution cap, income restrictions, and must be used by the beneficiary by the age of 30.

BONUS: Multi Purpose Term Life Insurance

A term life insurance policy otherwise known as Return of Premium.  This means you will get 100% of your money back at the end of the term.  This is a great option for those who are looking to save money, BUT want to have a lot of flexibility in terms of how the money is used.  This policy provides you life insurance while your kids are little, and then gives you a lump sum of money right around the time your kids are of college age. Terms can vary between 20 and 30 years.  The reason this is a good option is because it gives you a lot of freedom with how the money is spent.  You can even withdrawal the money an reinvest at the end of your term.  Let’s say your kids get a grant or scholarship, you could use the lump sum to make a large payment on the principle of your mortgage loan, or reinvest it for a down payment on your child’s future  first home.

Pros: kill 2 birds with 1 stone (insurance plus savings), no restrictions on use.

Cons: your money is not accessible (for the most part) until the end of your term, only returns what you put in … no growth.

Wherever you are in the process of saving for college, I hope these tips helped you or encouraged you to look into the options that are best for you and your family.  If you are a student who is looking to save for your own college tuition, check out Dave Ramsey’s College Savings Tips for Students!

Kristin Francy Insurance & Financial Services Agent

For tips on Insurance and Financial Services, visit those categories or my homepage.