How to Create a College Savings Plan for Your Child
Start saving now to help your child avoid student debt and unlock a future of financial freedom—small steps today lead to big wins tomorrow.
Higher education can open doors for your child’s future, but let's face it — college is expensive and the costs keep rising. In 2024, the average federal student loan debt per borrower was $38,375.1 If you start saving now, you could have a chance at helping your child live a debt-free life and achieve financial freedom. Here's how you can set up a game plan to save for their college, using popular programs and special accounts, while picking up some pro tips along the way.
Why Start Early?
When it comes to saving for your child’s college education, time is your best friend. The earlier you start, the more time your money has to grow. Waiting until they're older means you'll have to save more each month to reach the same goal. If you can’t contribute large amounts to help your child save for college, that’s okay! Even small contributions can add up over 18 years. Remember, every little bit helps!
What is a 529 Plan?
A 529 plan is one of the most popular college savings tools out there and is specifically designed for education savings. Here's how they work:
Tax Advantages: The money you invest in a 529 plan grows tax-free, and you won't pay taxes when you withdraw it for qualified education expenses like tuition, books, and even room and board.
Flexibility: 529 plans can be used at most colleges, universities, and even some trade schools in the U.S. and abroad.
High Contribution Limits: Unlike other savings accounts, 529 plans allow you to contribute significant amounts of money, often up to hundreds of thousands of dollars.
Pro tip! Some states even offer tax deductions for contributing to a 529 plan, so check what's available in your state. You can also set up automatic contributions to make saving effortless.
What are Custodial Accounts?
Custodial accounts are a way you can save for your child’s future. You (an adult) will set up the account, and your child will be listed as the beneficiary. Once they reach a certain age, typically 18 or 21, depending on your state, the account will become fully theirs. Here are a few things to note:
No Spending Limits: Money from a custodial account is not limited to school purchases. Once the child comes of age, they gain complete control over the account and can use the money for anything, like buying a car, renting, and more.
Tax Benefits: Earnings may be taxed at a minor’s tax rate up to a certain amount, which is typically less than the parent’s tax rate.
Financial Aid Impact: If your child needs to apply for financial aid in college, a custodial account could impact their eligibility because the money is considered their asset.
For families looking for a versatile way to save for their child's future without the education-specific constraints of other plans, custodial accounts can be a great option to consider.
Why Not Use a Regular Savings Account?
Instead of using a traditional savings account that earns 0.01% to 0.10% APY (Annual Percentage Yield), opt for a high-yield savings account that earns 3.5% to 5% APY or a certificate of deposit. Both options offer higher interest rates to help you save more over time using compound interest. Keep in mind that while you can withdraw from a savings account any time you want, a CD locks in your deposit for a set term between 3 to 60-months.
What About Florida Prepaid?
If you live in Florida, you've probably heard of the Florida Prepaid College Plan. With this plan, you can lock in current tuition rates, protecting yourself from future price increases. You pay a set amount over time, and when your child is ready for college, their tuition is covered. Here's what makes this plan stand out:
Predictability: You know exactly how much you'll need to save, so there are no surprises.
Guaranteed Savings: Your investment is guaranteed by the state of Florida, so your money will be there when you need it.
Variety of Plans: Florida Prepaid offers different options, such as covering two years at a community college, four years at a university, or a combination of both.
If you want to maximize your savings, you can pair a Florida Prepaid plan with a 529 plan to cover other expenses like textbooks or housing.
Saving for your child's college education is one of the most meaningful financial gifts you can give them. By starting early, you can help your child go to college without worrying about getting into debt with student loans. Every dollar you save brings your child closer to a brighter future, while giving you the peace of mind that comes with financial freedom. So start small and watch your efforts grow alongside your child. Their future self will thank you!