How much student loan debt do you think the average college student has when they finally get their degree? $10,000? Think again! According to the Wall Street Journal, the average American college student graduates with over $37,000 in student loan debt. They will be lucky to have that paid off before their own children attend college. Saving for college has never been more important! Here are a few easy ways to get started.
Education Savings Accounts (ESA)
An Education Savings Account or an Education IRA will allow you to save $2,000 per year per child in an account that is tax-free while it grows! If you begin saving from the time your child is born up until they turn 18, that’s $36,000 invested into their future. The account would earn a better rate of return than a regular savings account, and you will not be taxed until the money is withdrawn. There are income limits placed on the account to qualify, but these are a great way to get started while your child is young.
If you don’t meet the income limits for an ESA or you want to contribute more per year, a 529 Plan is a great option. The best 529 Plans allow you to choose the funds that you want to invest in through the account and generally have a maximum limit of $300,000. These accounts also grow tax-free and can be transferred from child to child if need be. These accounts also receive favorable financial aid treatment and are treated as parent assets and do not have to be reported on the FAFSA when funds are used to pay for college.
Roth IRAs are another good college savings option. Contributions can be withdrawn at any time for any reason and the normal early withdrawal penalty can be waived when spent on qualified higher education expenses. Most IRAs have a maximum yearly investment of $5,000, but if you begin saving from the time your child is born to the time they turn 18, you will have $90,000 saved for their future. The value of the account is not counted as an asset on the FAFSA, but withdraws to pay for college will be counted as income on the FAFSA.
It is never too early to begin saving for college. Talk to your local banker about these options to find the one that makes the most sense for you and your family. The bankers at Points West Community Bank are your resource for all your personal savings needs!