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How to Save for Your Child's College Costs

Parents and guardians want the best for their children, and in today’s world, the best often means some sort of higher education. While the cost of higher education can drastically vary, based on whether the child earns scholarships, goes for a two-year or a four-year degree, studies in their home state or elsewhere, or pursues postgraduate degrees, education can be a big investment. Many parents are left wondering how to save for a child’s education. One fail-safe suggestion for saving for college is to start early. How you choose to save is up to you.

Mother showing her child how to put a coin in a piggy bank

How to Save for a Child’s Education

529 Plans
529 plans are education savings and investment accounts that provide important tax benefits. As your account grows, you pay no taxes on investment earnings, and if your withdrawals are put toward qualifying education expenses, you will pay no federal taxes at that point either.
Qualifying expenses include a wide array of costs at accredited universities as well as student loan repayments. With your bank or investment professional, you can choose what sort of investment strategy you’d like to use to grow your savings for college. You can help create a custom strategy or simply use an age-based strategy. 
Coverdell Education Savings Account (ESA)
Previously known as an education IRA, an ESA is a tax-deferred trust account designed to fund education expenses. ESAs were created by the federal government to help families fund educational expenses for children.
An ESA has more limitations than a 529 plan, but the limits may not affect you as you’re saving for a kid’s college expenses. Unlike a 529 plan, an ESA must be established for a beneficiary who is under age 18 and the total maximum contribution to an ESA (or several ESAs) benefitting one person is $2,000 per year. In addition, ESA funds must be used before the beneficiary turns 30.
UGMA/UTMA Accounts
UGMA stands for Universal Gifts to Minors Act, and UTMA stands for Universal Transfers to Minors Act. Both are custodial investment accounts, held by an adult on behalf of a minor until the child reaches a certain age (often 18 or 25). These types of accounts have no contribution limits, unlike an ESA, but the earnings accrued in these accounts are taxable. A portion of the earnings may be tax-exempt, but not the total amount of earnings. Funds in a UGMA or UTMA account don’t have to be used for educational expenses. If your child decides not to pursue higher education, they’ll have access to this money when they reach the necessary age.
A Simple Savings Account
While a savings account likely won’t provide the same level of returns as an investment account, it can be a great place to start saving for college. Set up automatic transfers into your savings account from your checking account to make the habit of saving easy. As your funds grow, you can proceed to a more lucrative type of account.
Also, not all bills in college will be qualifying expenses. Parents and guardians may be wondering how to save for a child’s education expenses outside of tuition and room and board. You could set up an investment account to pay for tuition and set up a savings account to help a child pay for other incidentals. If a young adult has a job, you could inspire them to put away money for the future by saying you’ll match their deposits into this account. This way, you can help them prepare for the future in more ways than one. You’re contributing to their future financial health and teaching them the value of saving.
First National Bank and Trust is here to help you meet your goals in saving for college. We know this is a long-term goal, and setting a smart plan now can make a significant difference down the road. We have more resources to help guide you, and when you decide on how you want to start saving for a child’s education, we can help you set up a 529 plan, an ESA, a UGMA account, a UTMA account, or a traditional savings account. Your child deserves a bright future, and our helpful associates can help you create it. Read more about creating a college savings plan. Contact us or stop by one of our convenient locations in Southern Wisconsin and Northern Illinois.
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