When it comes to student loans, my husband and I have opposite stories. While my tuition was partly paid for by my parents and scholarship money, the rest came from $24,000 in student loans. My husband, on the other hand, sailed through school without taking on a single penny of debt.
That’s because his family had been saving in a college fund for most of his life. While I was struggling to make student loan payments and living on a shoestring budget after graduation, he was focusing on his passions and living comfortably on a more modest income than mine.
September is College Savings Month, so here are some of the best ways to save for your child’s college expenses – and how to get them involved in the process.
Types of College Saving Accounts
Start a 529
A 529 is a savings account specifically used for education-related expenses. Parents can contribute money to a 529, invest the proceeds and receive a special tax break.
The 529 is a popular option for parents because many states offer tax credits or deductions on contributions. The tax credits vary depending on where you live. For example, Indiana provides a $1,000 tax credit if you contribute $5,000, while Arizona residents can take a $5,000 deduction for individuals or $10,000 for families.
There are seven states that don’t allow any tax credits or deductions, including California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina.
529 contributions are not deductible on your federal taxes. If you live in a state without income tax, then opening a 529 won’t help you save money on taxes.
529 funds can only be spent on education-related expenses, including tuition, fees and textbooks. If that money is spent on ineligible fees, the family will have to pay a 10% penalty on their taxes. Traveling to and from college, paying for study abroad expenses and school supplies are some examples of non-qualified expenses.
Because you can invest money in a 529 like you would invest in a retirement account, your contributions can grow over time. You can invest those contributions in an index fund or mutual fund.
Many 529 providers allow you to create a personalized URL so other people can add money to the account. For example, you could send out this link before Christmas or your child’s birthday to encourage grandparents and other relatives to make a 529 contribution instead of buying toys.
Anyone can save in a 529, even if they’re not a parent, guardian or direct relative. Plus, they’ll also get the tax credit or deduction.
Each state creates its own annual limit for 529s, and they range from $235,000 to $529,000. Because the limits are so high, you don’t generally have to worry about exceeding them.
Parents who live in states without 529s can contribute to a Roth IRA. A Roth IRA is a special retirement account where you pay taxes on money going into your account, and then all future withdrawals are tax-free.
The annual contribution limit in 2020 for a Roth IRA is $6,000.
Encourage Your Child to Save
Making your child help save for their own education will teach them a valuable financial lesson. It will show them the importance of putting away money regularly and the patience of saving. If they have a part-time job, encourage them to put a percentage of that money toward their college fund.
If they get birthday or Christmas checks, convince them to deposit most of it in their college fund. Remember, your kids will barely remember the presents they got for Christmas, but they will remember when they apply for college and have to pay tens of thousands of dollars for tuition. You could incentive their savings habit by matching every dollar they put in.
Make Saving Automatic
Putting money away for college is similar to saving for retirement or any other long-term goal. It’s easier to save if you make it an automatic process. Most 529s, IRAs and other accounts let you set up automatic contributions from your checking or savings account.
Choose an amount you’re comfortable contributing every month. If you’re saving in a 529, try to save at least enough to get the maximum tax deduction or credit.
Open a Cash-Back Card
Instead of using a credit card to earn miles or other cash-back rewards, open a credit card that specifically helps you save for a 529. Here are a couple options:
Fidelity® Rewards Visa Signature® Card
The Fidelity® Rewards Visa Signature® Card provides 2% cashback on all purchases, and cardholders can transfer that cashback toward a Fidelity 529 account. If you spend $1,000 a month with the card, you’ll earn $240 a year in cashback.
There’s no limit on how much cashback you can earn, and there’s no annual fee. You’ll have to create a Fidelity-sponsored 529 account if you don’t already have one.
Upromise Mastercard from Barclays
The Upromise Mastercard offers 1.25% cashback on all purchases and provides a $100 sign-up bonus if you spend $500 within the first 90 days.
If you link the card to a 529 College Savings Plan, the cashback will receive a 15% bump. If you spend $1,000 a month, you’ll earn $172.5 in cashback rewards annually.
This card also comes with a round-up feature where you can round every transaction to the nearest dollar. The difference will be placed in your 529 and will also earn 1.25% cashback. There is no annual fee.
Apply for Scholarships
Once your child is in high school, they can start applying for merit-based and need-based scholarships to offset the cost of tuition. Students can start searching for scholarships at any point in high school, but should especially focus during their junior and senior years.
Students can search on national databases like Scholly and FastWeb, but also try to find scholarships on their own. They can search for scholarships based on their particular interests, city or state and other personal details. For example, if they’re interested in computer programming, they can find computer programming-specific scholarships.