Six Ways to Invest in Your Child’s Education

graduation cap on pile of dollars

Paying for a college education has always been a huge investment for individuals or families. However, with the rising cost of tuition at public and private colleges, many parents are becoming increasingly worried as to whether they can even afford to send their children off to college. Financial advisers are always here to help families with the investment of a college education, but there are six ways to invest in a child’s education that anyone can follow.

1. Start Immediately
Although many might find it overboard to start saving for college as soon as the child is born, starting early will help. Financial advisers recommend immediately forming a financial plan for college planning as soon, if not before, the child is born. Modest investments per month into an account over a very long period of time will add up. You may also run into situations where you go months without being able to add to the account, starting early will ensure that you will still save enough even if this happens.

2. If Starting Early, Invest in Stocks
With how money & markets work, the best approach to a college savings account can be to attach it to the stock market. The earlier the portfolio is created, the higher likelihood that the accounts will see gains from the fluctuations in the stock market. At the same time, if the family member feels concerned that the stock market may go down close to when their child is nearing college age, the family member can switch out the portfolio toward bonds away from stocks.

3. Consider a Financial Account for College Savings
The financial market has several types of accounts that are ideal for college savings. One example includes UGMA/UTMA accounts. UGMA/UTMA accounts are set up in the child’s name under their Social Security number, but the parents, guardian, or any other person, can be written in as a custodian to the account. Custodians can invest up to $11,000 a year per custodian into the account, with the first $700 tax-free when the child is under the age of 14. Once the child is over 14, the first $700 is taxed at a child tax-rate. Another financial account example is a 529 Plan. A 529 account is a tax-exempt account that will gather tax-free interest. These plans can have any beneficiary to them and the amount in the 529 account is not considered income, meaning that financial aid offices won’t count the 529 money against the student trying to get financial aid.

4. Use an IRA
Most parents may think an IRA is just for retirement. However, because of the rising costs in tuition, education-based IRAs have appeared in the financial market. Parents can set up a traditional IRA or a Roth IRA exclusively for college education. In addition, there is a financial account known as a Coverdell Educational Savings Account (ESA). These accounts act like a IRA, but all deposits, withdrawals, and interest are tax-free.

5. Use The Tax Code To One’s Advantage
Although this tip is applicable only when the child is in college, the tax code does reward parents with tax breaks and credits. The American Opportunity Tax Credit and the Lifetime Learning Credit can be used during tuition years. One can also deduct tuition or the interest from a student loan on one’s taxes.

6. Know What Savings Are Available
Dependent on the child’s academic merit or one’s socioeconomic status, the federal or state government or the college itself will offer many financial aid packages to help pay some college costs. Tuition plans like grants, scholarships, and utilizing the student loan market can help families cover many of the expenses with the cost of college.

Although parents can feel overwhelmed with the huge expense of college, there are financial investment strategies available that can help many families pay for college. Whether the strategies are started early in the child’s life or taken advantage of during the child’s college enrollment, parents can rest easy knowing there are things they can do to help their children reach their professional goals through college.

Earnest Parenting: help for parents trying to prepare for the expenses of college.

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