MoneyLife

What Are the Best College Funds for Children?

By Anna Yen
College funds for children

Kids are a total game-changer. We often don’t think about what happens eighteen years into the future, although we always wish our children as much success as possible. 

Going to college is a part of that success, but in order to get them on the best path, saving up for their college expenses is key. Let’s take a look at how to save for the future using the best college funds for children.

How does a college fund work?

A college fund is an account that allows you to save for your children’s education. The money that is saved in a college fund is set aside for future education opportunities, and sometimes, these savings can help you reap tax benefits. 

When should you start saving for a college education?

Start saving for college as soon as possible. If you recently had a child, it may seem like there’s plenty of time to start saving, but education costs are growing fast. 

Consider some of these stats from EducationData.org:

  • The average parental cost of an American college education is $57,981. 
  • In 2020, the average college fund for a child was $5,143. 
  • Parents pay roughly thirty percent of their child’s higher education costs. 

That’s a significant financial burden for parents to bear, especially if you don’t start saving until your child is older. Starting a college fund for your baby gives your money the time it needs to work for you and grow. 

What makes a good college fund?

Here are five factors that you should consider when deciding how to save for your kids’ college.

Post-tax contributions

Making after-tax contributions means you’ve already paid taxes on the money that is in your child’s college savings account. In tax-advantaged accounts like the 529 plan, you will not have to pay taxes on your kid’s college fund when you start using it to pay for educational expenses.

Invested funds

Putting your contribution into a regular savings account isn’t going to help with the growth of those funds like it would when it’s invested into investments such as the stock market. The average return of the stock market is usually closer to double-digit percentages, which will improve your return on investment overall. 

Tax-free withdrawals 

Being able to withdraw your funds whenever you need them without worrying about paying taxes will eliminate another concern. 

Annual contribution limits

A college savings plan that allows you to contribute without a limit annually gives you the ability to maximize those funds. 

Income restrictions

Your financial situation might vary over the course of your life, but that shouldn’t have to affect your ability to open up an account and start saving for your child’s higher education. That’s what child education savings plans are for! 

5 best college funds for children

Let’s take a look at how to save for your kid’s college fund and invest in their future.

1. 529 plan 

529 plans are tax-advantaged savings and investment accounts that can be used for qualifying college expenses like tuition, fees, or books. It’s a popular investment tool for parents saving up for their children’s education because it’s offered in every state.

Best For

  • Parents who can contribute regularly

Benefits

  • Low investment minimums 
  • High contribution limits
  • Uses after-tax dollars
  • Non-taxed withdrawals 

Disadvantages

  • Investment choices can be limited.
  • Plans can vary broadly depending on the state in which you reside. 
  • Rules surrounding 529 plans are strict.
  • Investments must only be used for qualified education-related expenses. 

2. ESA 

A Coverdell ESA allows savings for college tax-free where you can invest in virtually any security, unlike a 529 savings plan where you’re limited to the investments in the selected state. It allows you to pick stocks, bonds, mutual funds, and more. 

Best For

Benefits

  • More control over the investment options than with 529 plans
  • Use the funds for non-collegiate education as well as college expenses
  • Contributions will grow and be withdrawn tax-free for qualified expenses 

Disadvantages

  • Contributions limited to $2,000 per year 
  • Not available for households with higher income levels 
  • No contributions after your child turns eighteen
  • Must be used by the time the original beneficiary turns thirty 
  • Otherwise, must be moved to a 529 plan or another ESA with a different beneficiary 

3. UTMA

The Uniform Transfer to Minors Act (UTMA) is a custodial account that allows a minor to receive gifts such as money, real estate, patents, or other assets without the prerequisite of a guardian. 

Best For

  • Parents who wish to pass their gifts without a formal trust

Benefits

  • Easy to establish and less expensive than trusts
  • Can hold almost any asset or investment offered by a financial institution
  • No income or contribution limits 

Disadvantages

  • May affect your child’s ability to qualify for financial aid 
  • May minimize a child’s eligibility for federal student loans

4. UGMA

Uniform Gifts to Minors Act (UTMA) is a type of custodial account that allows you to gift security assets like individual securities, real estate, and bank deposits. 

Best For

  • Parents who want to gift assets to their children 

Benefits

  • Transferring income-producing assets to your child could lower your income taxes.
  • The contribution amounts aren’t limited. 
  • Anyone can contribute funds on behalf of your child. 

Disadvantages

  • Once assets are transferred, the transfers cannot be reversed. 
  • Federal gift tax must be paid on contributions greater than $14,000 per year. 
  • The UGMA account may adversely affect your child’s ability to qualify for financial aid. 

5. Savings account

A savings account is an interest-bearing bank account. It’s one of the easiest ways to start putting money aside for future financial goals. Your child can even contribute money to their own savings account once they start making money on their own. 

Encouraging your child to save at least 50% of their income will not only help them reach their higher education goals but also build good habits. 

Best For

  • Parents who want to start saving for their kids 
  • Parents interested in a no-frills option

Benefits

  • Easy to open an account
  • No limits on contributions 
  • Simplistic and straight-forward 

Disadvantages

  • No tax advantages
  • Low returns on investments

Other ways to make college less expensive

While the following child education savings plans are great methods of saving money for your children’s future college expenses, not everyone has money to put aside. Luckily, there are other ways to minimize the overall costs of college and make paying for college more manageable. Let’s take a look at three ways to make college less expensive! 

1. Take AP courses

Schools can offer college credit if students pass Advanced Placement courses with a grade of either four or five. Earn credit towards a college degree for free!

Best For

  • High-achieving students

Benefits

  • A way for students to earn college credit in high school

Disadvantages

  • Credit depends on the institution

2. Apply for financial aid

Students can apply for financial aid that consists of federal grants, scholarships, work-study opportunities, and loans. Filling out the FAFSA form is often a requirement for federal and private scholarships or grants. For free aid, avoid the loans!

Best For 

  • Students who qualify for financial aid

Benefits

  • Provides access to federal funding and grants

Disadvantages

  • Financial aid packages usually include loans

3. Apply for scholarships

Scholarships are usually merit-based funds awarded to students who meet specific criteria.

Best For

  • Students looking for free money!

Benefits

  • No strings attached 

Disadvantages

  • Can take time to find suitable scholarships 

Choosing the right college fund investment for your child

Opening a college savings plan for your child is the best gift you can give them. You don’t always have to put a lot of money towards the savings account right away either. The important thing is to start a safety net and college fund as early as you can!

Not sure what to invest in? For just $1 per month, you can open a fully managed investment account with MoneyLion. It’ll help get your child on track for his or her future!

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