Making a Plan to Save for College: Setting Priorities and Exploring Options

When to Start Saving for College

Before you consider how to start saving for college, you should first deliberate as a family over when to start saving for college.

The answer to when you should begin to save for college sounds like a relatively simple one: as early as you are able and comfortable to do so. What exactly does this mean, though? It means that, as you’re considering your family budget, there are other expenses and savings that you might want to prioritize over contributing to college funds.

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For instance, if you’re carrying credit card debt or even your own student loans, you may want to prioritize paying these down first. After all, the accrual of interest on these debts means you’ll only pay more the longer you wait.

Beyond personal debt, you’ll need to consider how much emergency savings are adequate for your family. Setting aside between three to six months’ worth of expenses is a common goal, and doing so can help prepare you for the unexpected.

Lastly, there’s that other costly future life event to consider: retirement. While the answer to the question of whether to prioritize your personal retirement over your children’s college savings isn’t by any means a simple yes or no, there’s good reason to think that your retirement plan ought to take precedence. The main reason is straightforward: there’s no borrowing your way to retirement. While those who attend college can finance their education through loans, there is no similar option for wannabe retirees.

Of course, this doesn’t mean that you need to necessarily sacrifice one for the other. Instead, the onus is on families to strike the right sense of balance between parents’ future needs and their children’s.

College Savings Options

With your debt adequately limited or entirely paid off, an emergency fund ready to go, and a retirement savings plan in place, you can explore your college savings options and help secure a crucial part of your kids’ future.

While there are a number of financial instruments and methods out there for families to use, ranging from regular savings accounts to Roth IRAs, there are two specialized college savings options that are most frequently put to use: 529 plans and education savings accounts.

About 529 Plans

Perhaps the most popular way that families put money away for college expenses, a 529 plan is an investment plan that offers specific tax and financial aid benefits that vary from state to state. Typically, families add contributions to their plan over time and select where to invest these funds. The principal benefit that they provide to those saving for college is that, while the money that goes into the plan has already been taxed, the gains that any account accrues over time may be used tax-free, so long as they go toward qualified education expenses.

In addition to this benefit, 529 plans are available to anyone and any family, regardless of their income, and there are no limits on the amount of time that money can remain in a 529 account. Plus, while each plan has one dedicated beneficiary, account holders are able to change that beneficiary at any time to another member of their family, an excellent option in the event that the funds are not needed for the original beneficiary.

Virtually the only downside to 529 accounts is that their funds must be used toward education expenses. Otherwise, withdrawing funds will lead to additional income taxes and a 10 percent penalty on earnings.

About Education Savings Accounts

Education savings accounts (ESAs) are investment accounts that enable parents to contribute up $2,000 per year for children aged 18 or younger. Like 529 plans, this money may be withdrawn tax-free when used toward qualified educational expenses. Where ESAs differ from 529s is in these qualified expenses. While there are annual limits to how much a family can withdraw from a 529 plan toward K-12 tuition, ESA account holders can put their gains toward a range of K-12-related expenses that include tuition and everything from school uniforms to tutoring.

While this flexibility is a great option for some families, the major downside to using an ESA to save for college is its contribution limit. So, if you’re able to save more than $2,000 in a given year toward college, you might be better served by a 529 plan. Additionally, ESAs have income limits ($95,000 adjusted gross income for individuals; $190,000 for those filing taxes jointly) that might affect your family’s eligibility to contribute, and they do not offer the same state tax breaks as 529s.

Moving Forward, Month by Month

After you’ve taken into account your potential college savings options, you can carve out a plan to continue making contributions. And while the journey toward your children’s first days of college is a long one, with the right planning and resources, the process of financing their education very well might be best tackled with a concerted, short-term approach.

Including college savings contributions in your monthly budget, assessing your progress over time, and making adjustments is a practical plan that can help you achieve your goals. Plus, it can help you stave off the anxiety associated with the cost of college, so that you can enjoy all that time with your children, while they’re still home, along the way.