Five Smart College Savings Options for Millennial Parents

If you’re a Millennial with kids, then you know how expensive they can be. And if you choose to send your kids to private school, then you’ve probably realized that education costs will comprise some of your heaviest financial burdens as a parent. These costs can begin as early as preschool, and continue as late as graduate school. While Fidelity’s 2015 College Savings Indicator Study revealed that 69 percent of Millennials in the US are actively saving for their children’s college education, it also indicated that these same families are on track to meet just 27 percent of their savings goals by the time their kids are ready to enroll. With tuition costs on the rise, it’s crucial that you maximize your college savings today. These five savings options will improve your chances of meeting your children’s tuition costs between now and their freshman year.

1. Coverdell Education Savings Account. Generally considered the most flexible savings plan available, a Coverdell education savings account (Coverdell ESA) provides a reliable tax shelter for your investment earnings. While annual contributions are capped at $2,000 and must cease when your child turns 18, you can use the money for a variety of educational expenses – and not just college or grad school. These educational expenses include private school tuition, academic tutoring, and a computer while your child is in junior high or high school.

2. 529 College Savings Plans. 529 plans are usually categorized as either savings or prepaid plans. Savings plans work much like 401(k)s or IRAs – your savings account will go up or down in value based on the performance of the investments you select. Unlike a Coverdell ESA, 529 savings plans can only cover college and graduate school expenses – so you can’t use them to pay tuition for private elementary school or high school. While contributions to 529 savings plans are treated as gifts under federal law and technically subject to the federal gift tax, you can spread a lump-sum contribution over five years in order to avoid gift tax liability.

Prepaid savings plans allow you to prepay all or part of the costs of an in-state public college. They may also be converted for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges. Educational institutions can offer a 529 prepaid plan, but not a 529 savings plan (to date, the Private College 529 Plan is the only institutionally-sponsored 529 plan in existence). With a prepaid tuition plan, you can make contributions directly to a specific college or university long before your child enrolls. Processing of the payment is contingent on your child enrolling in the institution. If your child does not enroll at the college in question, you get your money back. 529 prepaid plans are not risk-free, however, and some are seriously underfunded. A few have been shut down over the past five years, and several are no longer accepting new enrollments.

3. Education Savings Bonds. One of the most conservative ways to save for your child’s education, US savings bonds offer a guaranteed – albeit small – return on your original investment. Provided you use the money to pay for your child’s college or graduate school tuition, the interest you accrue on a Series EE or Series I savings bond is entirely tax-free. Just remember that eligibility for an education savings bond is contingent upon level of income, and these limits can change annually. If you start making too much money, you may not be able to participate. While you won’t lose any money on savings bonds during an economic downturn, don’t expect any big returns during a bull market.

4. Custodial Accounts. Although custodial accounts are not specifically for education savings, they allow you to give money directly to your child without the expense and administrative hassle of setting up a conventional trust. Since you aren’t required to spend the money in your child’s custodial account on tuition, many parents reserve these funds for school-related expenses such as computers, tutors, musical training, or athletic equipment. While there is no tax exemption for custodial accounts, the earnings in the account get taxed at your child’s rate – which is significantly lower than your tax rate.

5. Roth IRA. While technically a retirement plan, the Roth IRA contains a loophole that allows you to withdraw money to cover your child’s higher education expenses without paying a penalty. If you wait until you reach the age of 59 and a half to withdraw money, however, you won’t owe any taxes on your earnings – which is why this type of savings account may be better for slightly older parents than Millennials. The one big drawback to the Roth IRA is that the distribution will be taken into account on your child’s federal financial aid application for the following year.

Here’s a bonus college savings tip: Make sure you have enough life insurance to cover your child’s tuition in the event that something happens to you. Your passing will be hard enough for your child to bear; having to drop out of college because you’re no longer around to pay tuition would only add insult to injury. A life insurance policy is also a great way to cover a private college loan that you’ve cosigned for your child. SelectQuote’s expert agents can advise you on whether or not you have enough coverage to account for rising tuition costs – and help you get more for less, if necessary. To find out more, click here or call 1-855-872-1266.

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