5 Ways to Save for Your Child’s Education

Saving for your child’s education is a critical goal that requires careful and strategic planning. With the rate of rising tuition costs and the growing importance of higher education, it is certainly essential to explore effective strategies that will build a solid education fund for your child to use. In this article, we will discuss ways to save for your child’s education that will help set them up for success.

1. 529 College Savings Plans:

The most popular and advantageous ways to save for education is through a 529 College Savings Plan. These are state-sponsored investment accounts that offer tax advantages and allow for your contributions to grow tax-free. Funds accumulated in a 529 Plan can be used for qualified educational expenses including tuition, room and board, and books. These plans typically have an account owner and a beneficiary, which can be the same person.

Maryland 529 Plans were previously categorized as either Prepaid College Savings Plan or Prepaid Tuition. College Savings Plans allow you to make contributions on an after-tax basis and invest those contributions in investment options of your choice. As of June 1, 2023, Maryland Prepaid College Trusts will no longer be accepting new enrollments. In Maryland, contributions to a 529 Plan are tax deductible up to $5,000 per beneficiary per year.  In addition, any family member or friend can contribute to the 529 Plan, making it a great option. MD 529 Plans can also be used for elementary and secondary education, but only for private school tuition up to $10,000 per beneficiary per year.

It is important to take the time to talk to your financial advisor to review your state tax laws and compare different state plans to find one that best suits your situation.

2. Education Savings Accounts (ESAs):

Another tax-advantaged option to save for your child’s education is through an Education Savings Account, also known as Coverdell ESAs. Compared to 529s, ESAs offer more flexibility in terms of what expenses are considered qualified. For example, they allow for not only higher education expenses but also certain qualified elementary and secondary education expenses. Like 529s, earnings grow within the tax-deferred account and can be withdrawn tax-free when used for qualified educational purposes; however, there is no tax deduction for contributions.

ESAs have a few more guidelines than 529 Plans. The designated beneficiary must be under the age of 18, and the account must be set up as a Coverdell ESA when created. There are other specific criteria that should be considered when creating the account. Consult with your financial advisor to understand the complexities of these accounts.

3. Savings and Investment Accounts:

Regular savings and investment accounts are the more traditional way of saving for your child’s education. This could be achieved with a savings account, specifically one that yields a high interest rate, or a brokerage investment account that could be invested in the market. For the brokerage accounts, you can explore different investment options such as stocks, bonds, mutual funds, or exchange-traded funds (ETFs) for the potential to grow the account over time. If you start to contribute early and on a regular basis to an account that is dedicated specifically to your child’s education, the better off the accounts will be. Consider setting up automatic transfers from your paycheck to ensure consistent savings. If you decide to use an investment account, be sure to consult with your financial advisor so that they can carefully evaluate risks and can align the investments with your risk tolerance and time horizon. This type of savings offers the greatest flexibility but does not offer the tax-deferred growth or tax-free withdrawal options of the 529s or Coverdell ESAs.

4. Scholarships, Grants, & Financial Aid:

It is important to encourage your child to explore scholarships, grants, and other financial aid opportunities as they progress along their educational journey. Keep track of application deadlines and requirements to ensure your child is maximizing their chances of securing financial assistance. The Free Application for Federal Student Aid (FAFSA) is one of the main sources to use when applying for federal and state financial aid. Typically, the U.S. Department of Education releases the FAFSA on October 1^st each year. However, the Department of Education has announced that they will not release the 2024-2025 FAFSA until December due to the recent redesign aimed at making the FAFSA application simpler to fill out. State deadlines vary. Aid is limited, and as a result, the sooner you apply, the more aid is available. Federal financial aid is need-based and determined by what is now called the Student Aid Index, formally known as the Expected Family Contribution. The college(s) your child decides to go to will then use the FAFSA data to determine federal aid eligibility.

Various organizations, institutions, and governments offer scholarships based on academic merit, extracurricular activities, and financial need. The finance office of the school or university is a great place to have your child ask what scholarships are available to determine what to apply for. Each school within a university typically offers specific scholarships unique to the major chosen. It is also important to know the difference between grants and loans. Grants are awarded to students based on financial need and do not need to be paid back. However, loans are borrowed from a creditor with the expectation that they will be paid back. Students can borrow money through federal student loans (government) or private student loans (banks or credit unions). Overall, exploring financial aid can significantly reduce the burden on your savings while providing valuable opportunities for your child.

5. Personal Budgeting and Cost-Effective Choices:

Incorporate personal budgeting techniques into your daily life to free up additional funds for education savings. Review your expenses and identify areas where you may be able to cut back or reduce unnecessary spending to redirect those savings towards your child’s education funds. However, it is important to work with your financial advisor to incorporate education planning into your long-term retirement plan to ensure you do not sacrifice one goal for the other. Additionally, encourage your child to consider cost effective choices like community college or in-state universities, which offer quality education at a lower cost. Also, encourage your child to take Advanced Placement (AP) courses in high school or online transferrable credits. This allows them to earn credits early and accelerate the path to college graduation. By making conscious financial decisions, you can optimize your savings and make education more affordable.

Like any financial goal you are working towards, saving for your child’s education requires discipline, planning, and the exploration of the various options available. By combining tax-advantaged savings plans, regular contributions and savings, investment strategies, scholarship pursuits, and personal budgeting, you can create a robust education plan for your child. Remember to start early and be consistent in your efforts. This will almost certainly give your child a head start in securing their educational future.

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