The Best Way to Set Up a College Fund

While college enrollment seems to be dropping—with only about 16.9 million students enrolled in the spring of 2024—pursuing a college education is still one of those American dreams. But, going to college doesn’t come cheap. In fact, it costs a pretty penny these days to achieve that collegiate-level education. Recent reports suggest that tuition and related fees for this most recent school year came in at $23,630 for out-of-state students at public universities, $10,662 for in-state students at public schools, and $42,162 for private colleges.

Most parents don’t likely have this kind of money sitting around without some advance planning. That’s why many students and families are relying on loans to fund their college careers. In this brief guide, we’ll provide the inside scoop on the best methods to set up a college fund so that you can rely less on loans and pay more of those educational costs upfront. 

Types of College Savings Account

Saving in advance for a college education is one of the most tried-and-true ways to put a student through college or university. With high costs, even taking out loans at an average student loan interest rate of 6.87% can be intimidating, to say the least. Many kids find out they owe tens of thousands of dollars in student loans upon graduation. So, some advance parental planning when kids are young can pay off big time.

Now that you understand the importance of planning for college expenses early, let's explore different types of college savings accounts that can help secure a student’s educational future. Each account has unique features suited to different saving strategies.

529 College Savings Plans

A 529 plan offers a powerful way to save for college. Contributions grow tax-free, and withdrawals are tax-exempt for qualified education expenses. Many states also offer tax deductions or credits for contributions, making it an attractive option for families planning for higher education costs.

Coverdell Education Savings Accounts (ESA)

Coverdell ESAs allow families to contribute up to $2,000 per year for educational expenses from elementary through college. Like 529 plans, the growth is tax-free if used for educational purposes. However, there are income limits for contributors, which may limit its availability to some families.

Custodial Accounts (UGMA/UTMA)

Custodial accounts are flexible in that they can be used for any expense that benefits the child—not just educational costs. However, the control over these accounts transfers to the child when they reach legal age, which could lead to spending decisions that may not align with educational goals.

Traditional Savings Accounts

While regular savings accounts offer liquidity and are easy to set up, they typically provide lower interest rates than other savings options and lack the tax advantages tailored explicitly for education expenses. Their simplicity and accessibility make them a viable option for short-term savings or emergency educational funds.

Investment Options for College Funds

Another option to help ensure you have enough money to pay for a college education for your child is to consider investment options. Depending on the risk you are willing to take, investments can help you grow those funds quickly.

Stocks and Bonds

Investing in stocks and bonds offers the potential for significant growth over time, ideal for long-term savings goals like college funds. While stocks provide higher potential returns (and higher risk), bonds can offer more stability. A balanced portfolio of both can help manage risk while aiming for growth.

Mutual Funds and ETFs

Mutual funds and exchange-traded funds (ETFs) offer an excellent solution for investors looking to diversify without the complexities of selecting individual stocks or bonds. By aggregating capital from numerous investors, these funds can invest in a broad spectrum of securities, improving investment growth's stability and diminishing the likelihood of losses from specific asset failures.

Age-Based Portfolios

Age-based portfolios automatically adjust the mix of investments based on the child’s age and how close they are to starting college. These portfolios typically shift from aggressive investments (like stocks) to more conservative options (like bonds) as college approaches, reducing risk and focusing on preserving capital as the need for fund withdrawals gets closer.

Methods & Software for Tracking Spending

As with any financial endeavor, it’s important to keep track of where you are at and how you are tracking toward your goal. Here are some of the common approaches that we see others take. 

Manual Tracking 

While many people today prefer more digital methods, manual tracking can still be highly effective, especially if that is how you have always done it. You can use a trusty spiral-bound notebook or journal or try a computerized approach with a spreadsheet. If you try one of these approaches, you have a backup in case something happens.

Digital Tools 

There is no shortage of investment tracking tools today. Digital tools and apps make tracking investments and spending more accessible and efficient. Apps like Acorns offer micro-investing by rounding up your purchases to the nearest dollar and investing the difference, making it easy to start small and invest more as your comfort level increases. 

Platforms like Robinhood and Fidelity provide user-friendly interfaces for more active investment management. For those looking for robust financial services, Charles Schwab offers a range of tools that help track both spending and investments comprehensively. Each of these platforms comes with unique features tailored to different types of investors, from beginners to the more experienced.

Automated Alerts

Automated alerts help by notifying you when spending reaches preset thresholds or when unusual activity is detected in your accounts. This immediate feedback can help prevent overspending and detect potential fraud early, ensuring your investments and savings remain secure and on track.

Additional Strategies for Growing a College Fund 

Of course, there are some other ways you can help your child grow their college fund. And part of this starts when they’re too young to know what’s happening. Consider taking a percentage of any monetary gift your child receives and putting it immediately into their savings account or whatever plan you have for their college fund.

An article several years ago from Suze Orman suggested that you should have your child break out their monetary gifts in three ways:

• Keep 50% for whatever they want
• Put 40% into their savings account or college fund
• Donate 10% to a charity or good cause

This approach teaches kids early on the value of living within their means, the significance of savings, and the importance of adopting a giving mindset. This approach can work for both parental contributions and family gifts. Any time your child receives money, they can participate in this plan, and it will help set them up for success later in life when they build their first family budget.

Also, be sure to understand the rules and limits of tax-free gifts. In the U.S., individuals can give up to $17,000 per year (as of 2024) to another person without incurring any gift tax liabilities. For couples, this amount doubles, allowing contributions of up to $34,000 to an individual each year tax-free. This exemption means parents and relatives can significantly support a child’s college fund without triggering extra taxes.

Know Your Options When It Comes to College Funds For Your Child 

While this article focused largely on ways to set up a college fund, we know that not everyone has the spare money to set funds aside for their child. So, rest assured that financial aid is still an option for most students. Also, research grants and interest-free loans can help augment your child’s college savings plan. Lastly, reach out to a financial advisor if you need further guidance.

Want more great insights on financial literacy and planning? Follow the Cash Store blog.

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