You can probably guess that I get a lot of questions from prospective college students and their parents. Along with how to get into college, “What’s the best way to save for college?” tops the list.
The truth is, there are several different—and effective—ways to save for college. Today, I’m going to share some of the common methods for saving for college, as well as some of my top budgeting tips for college students.
How to Save for Your Child’s College Education
Before I get to how a college student can budget once they’re already in college, let’s talk about three good options for how parents can save money to get their child to college in the first place.
Choosing the best way to save for college depends on so many factors that no one answer is right for every family. These are three of the most popular ways parents save for their child’s education. We’re going to explain a bit about each one to help you determine what might make sense for you.
- Education Savings Account (ESA) or Education IRA
- 529 Plan
- UTMA or UGMA (Uniform Transfer/Gift to Minors Act)
Education Savings Account (ESA)
With an Education Savings Account (ESA), you can save $2,000 (after tax) per year, per child. The best part is, it grows tax-free. However, the amount it grows will depend on the investments in the account. Luckily, you’ll usually earn a much higher rate of return with an ESA than you do with a regular savings account. You also won’t need to pay taxes when you withdraw the ESA money for education expenses.
Just keep in mind, the money in an ESA must be used by the beneficiary by the time they’re 30, and you must also be within a certain income limit to qualify. Learn more about these plans here.
With a 529 plan, you can save for your children’s college education with higher limits than you get with an ESA. Limits vary from state to state, but most account-holders can contribute up to $300,000. Conveniently, these accounts aren’t designated to a specific child either. Perhaps your firstborn decides to take a different route than post-secondary education. This money can be used for your younger child’s education instead, although this could come with some restrictions in certain cases.
UTMA or UGMA (Uniform Transfer/Gift to Minors Act)
Unlike a 529 plan or an ESA, the money in a UTMA or UGMA does not necessarily need to be used for education. When the beneficiary reaches age 21 (or age 18 for the UGMA), they get control of this account to use as they wish. There are some tax benefits to these accounts as well: since the assets are technically the property of the minor, a portion of the investment income goes untaxed. Then, an equal amount is taxed at the child’s tax rate, rather than the parents’ or other custodians’ rate.
Budgeting for College Students
Whether your parents have saved for your college or you’re relying on student loans and your own income, budgeting for college students can be a challenging—yet critical—task.
Though it’s often overlooked, one of my favorite ways for college students to save money is choosing a college with free laundry. I explore this topic even more in this blog post.
Here are some of the other ways college students can save money:
- Create a budget that clearly outlines your expenses vs. your income. This should always be the first step. It’s a quick way to see obvious areas that could be a problem (like a $7 coffee per day habit!).
- Always research scholarships you could be eligible for. Here are some case studies of how the students I work with have scored big scholarships.
- Compare the cost of living on campus vs. off. Price isn’t the only consideration here either. Here are some of the pros and cons of living off-campus.
- Buy used textbooks whenever possible. This can be an incredible money-saving method for college students, especially considering textbook costs are estimated to have jumped 812% in the last 35 years.
- Seek out campus resources for cheap—or free—fun activities at school.
- Utilize free campus amenities whenever possible.
- Limit meals out, especially if you’re already paying for a meal plan and living on campus.
Easing the financial burden of a college education is possible, although it can come with its challenges. Whether you’re saving money for a future college education or trying to cut back on costs as a student, it takes planning and forethought to pull it off.
But help is available!
If you’re looking for one-on-one guidance to help you your teen get in and get money for college, click here to learn more.
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