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How to Start a College Fund: The Ultimate Guide 2021

Written by Banks Editorial Team

Updated September 18, 2023​

3 min. read​

When many college students and graduates are knee-deep in student loans, it is more crucial than ever to learn how to start a college fund for your child while there’s still time to prepare for expenses that go with supporting their dreams and giving them higher education.

Many parents are struggling to cover the massive costs of getting an education. Education Data reports that student loan debt in the United States totals $1.71 trillion and grows 6 times faster than the nation’s economy.

With that in mind, the better prepared you are now, the better your financial situation will be down the road if you get ready to learn how to start a college fund for your kids sooner than later.

Calculate the Costs of your Child’s Education

Before doing anything else, start crunching numbers to estimate the cost of your child’s education. Every successful education savings plan begins with a goal in mind. Although it can be hard to predict college funding costs years in advance, a ballpark allows you to make informed decisions on how much to contribute, how often, and with whom.

If you’re wondering how much you should save for college, here’s some research about tuition and inflation that may help:

  • FinAid reports that “on average, tuition tends to increase about 8% per year. An 8% college inflation rate means that the cost of college doubles every nine years.”
  • According to U.S. News’s annual survey data, “The average cost of tuition and fees for the 2020–2021 school year was $41,411 for private colleges, $11,171 for state residents at public colleges, $26,809 for out-of-state students at state schools.”

Since numbers fluctuate depending on your child’s college ends up attending, only use this as a guide and not an accurate representation of what you or your child will pay in the future.

Choosing A College Fund Saving Option

Your next step is to explore your options and choose a college fund account that fits you and your child’s needs. Here are several options to consider for the best savings account for kids’ college.

1. Education Savings Account (ESA) or Education IRA

An education savings account is an investment for a child’s future education. While it can be a great supplement to a 529 for some people, it also has some downfalls you should be aware of before opening an account: 

  • Only $2,000 per year, per kid/ESA, can be contributed
  • It has an income limit.
  • Withdraws that are not made for educational purposes are taxed.
  • The beneficiary has to use money by 30, or it is vulnerable to tax and penalties. 

While a 529 college investment account is strictly used for paying tuition, an ESA or Education IRA is another form of savings that is dedicated to paying college tuition and other qualified educational expenses involved with elementary or secondary schooling (i.e., books, supplies, room and board, internet access, computers, etc.).

2. 529 College Savings Plan

You can use a 529 college savings plan for any educational tuition, ranging from private schooling for K — 12 or college tuition in the years to follow. The beneficiary (presumably your child) is named, and money can be transferred tax-free. This means you can contribute up to a certain amount without being subject to tax, as long as that money is only used for its intended purpose. 

Since savings account typically pay less than 1% return in interest, a 529 college account is a better option in the long run. In just the time between 2011 and 2020, the average growth rate was 12%, meaning all the monthly payments made to the account during that time saw a 12% increase in return. That said, the more that is contributed, the higher the return.

3. UTMA or UGMA (Uniform Transfer/Gift to Minors Act)

A UTMA or UGMA account doesn’t have any particular advantages like most school savings accounts where you watch your child’s funding grow, other than what you contribute specifically. Although contributed funds still go untaxed up to a certain amount, tax rates are equal to that of a minor gifted.

These accounts are considered custodial accounts under the control and supervision of a parent/guardian until the minor is old enough to access and control the funds themselves.

4. Bank Savings Account

Traditional bank savings accounts are another option you can consider, but they’re not explicitly suited for educational purposes. Fees and requirements differ from institution to institution. Still, generally, funds can be accessed at any time for anything without a penalty — as long as the account sits at the required amount and there aren’t more withdraws than specified in the terms (penalized when this happens).

Return on interests is typically lower than 1%.

5. Mutual Funds

Mutual funding is another route you can take with your child’s educational funds. This college investment plan consists of a group of professionals managing your investment and others in a pool of money to maximize your opportunities. 

It can be great for portfolio management, and it’s less risky than other options, convenient, and reasonably priced in most cases. On the other hand, it sometimes has high fees and can be poorly executed and abused by management if you don’t go with your investment’s right institution.

6. Permanent Life Insurance Policy

A permanent life insurance policy consists of several premium payments from when you purchase the policy until you pass away. Payments are then divided into a portion going towards your death benefit and a portion going into a separate account. 

This option can be more beneficial than a 529 in cases where your child decides they don’t want to go to college when it comes time. All the money in your 529 is subjected to a lot of taxing, but using life insurance for college has more flexibility. It’s also not included in calculations made for financial aid, maximizing your child’s potential to receive additional government support.

If you are wondering how to start a college fund, this could be an option to explore. The problem, however, is that the fees are outrageously high, and it can take more than a decade to accumulate more than you pay in premiums. 

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