Saving Up for College Fees

Alongside your hopes and dreams for your children’s academic future comes the worry over funding their college years. Nowadays, a fifth of students graduate at least $50,000 in debt, which can strike fear into the hearts of young people and their parents.

Of course, getting a college or university education is key to securing a higher salary down the line, but it’s a very expensive key. Realistically, many parents are still paying off their own tuition and when you consider the fact that tuition keeps on rising in cost, that’s a lot of family debt!

Too many families don’t look far enough into the future

Around a third of middle-income families save for their kids’ college fees from the start and just over a quarter of lower-income families start a stash. Families who do save aim to put away $40,000 per child but most only manage half that.

How to save more effectively

Use a Roth IRA

Most people associate Roth IRAs with retirement but they can also be used for college savings. You use after-tax money to fund these accounts and you can also withdraw money from them tax-free. You can also bring precious metals into your Roth IRA, although this part of the portfolio is treated a little differently. If you’re interested in metals, start here to find out more.

With a Roth IRA you can draw down some funds – tax and penalty-free – after five years to pay for education. This is a good idea if you’re not 100% sure all or any of your children will go to college – if they don’t, then you use the funds for your retirement years.

A 529 college plan

Also known as Qualified Tuition Programs, these vehicles are funded by after-tax money and you can only use the funds and gains for educational expenses (tuition, books, equipment) tax-free. More than 30 states offer QTPs and each state’s terms, limits and annual fees vary, but not hugely.

Unlike the Roth IRA, if your child doesn’t go to college, you can face penalties if you withdraw the funds. Many people transfer the fund to someone else within the family, but you need to talk to an advisor before you make these plans.

Pre-paid tuition plans

These are a great idea if you’re worried about the rising cost of tuition. You pay a proportion of what a year’s tuition costs now and this proportion is locked in, regardless of how much inflation hits fees. For example, if you pay $10,000 out of the $20,000 that a year at Fancy University costs, you’ve paid half. When Junior heads off to Fancy University 15 years down the line and a year costs $60,000, your $10,000 is worth $30,000 in tuition – half the fees. Clever, eh?

Several states already offer pre-paid tuition plans, although some of them aren’t taking any new enrolments. If you can get onto one, then do so, as the gains from these funds are most often free from federal taxes.

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