As parents, many of us want our children to grow up, graduate high school, and enroll in college. However, it can be difficult to know exactly whether a college education will be right for our kids. Yet, one of the biggest mistakes parents can make is not starting a college fund and “waiting to see” whether their child decides to go to college.
By the time your teen is finishing up high school, tuition rates could have doubled, tripled, or quadrupled from what they are now. You cannot count on your child being the next Einstein genius and securing a full paid scholarship, either, since that is another terrible mistake you can make.
While there are plenty of scholarship opportunities available, you still should be prepared in case your child only gets a partial scholarship. How do you start building your child’s college fund? There are a variety of different options you could explore, from 529 state college savings plans to prepaid tuition and certain IRA accounts.
Part of the problem with savings plans and IRA accounts is there are limits to how much people can save and contribute. However, setting aside something is still better than nothing. Otherwise, you and your freshman college student could be faced with taking out student loans if they do not qualify for financial aid programs.
With 529 savings plans, you deposit money into the account post-tax from your net earnings. Once your child starts college, you can withdraw funds from the account tax-free and use them to pay for tuition and college-related expenses. The drawback with this option is, if you solely rely upon the savings, you are not eligible to take the federal tax education credits.
On the other hand, opening a Roth IRA account would be another way to save for retirement and your child’s college education simultaneously. You can make withdrawals after five years without penalties if the money is going toward qualifying college education expenses.
Plus, if your child decides they don’t want to go to college or is lucky enough to get a full-paid scholarship, you will have that much more set aside for your retirement. The drawback to saving for college with a Roth IRA is there are annual contribution limits, so you may not be able to save enough to cover the entire costs of your child’s college education.
A third method you could consider is that some universities and colleges offer prepaid tuition at today’s rates. For instance, if the yearly cost of tuition and fees is currently $10,000, and you prepay this now, then it won’t matter what the current tuition and fees are when your child starts college.
Some parents also use a combination of 529 plans, Roth IRAs, and prepaid tuition when they are available in their state. To find out what options are available here in Texas to start a college fund for your child, please feel free to stop by your nearest branch location of The People’s Federal Credit Union or call us at 806-359-8571 today!