5 strategic ways to save for your child’s college tuition

With rising costs for college tuition – which range from $9,410 for in-state public universities to $32,410 per year at private colleges – saving for your child’s tuition is a challenging task.

But as daunting as it may seem, you can successfully create a savings plan for your child’s college education by carefully considering your options like investment planning, tax deductions and other financial planning tools. In other words, it’s not only important to know how you’ll save money, but also where you’ll place your money.

Consider these five strategic places to save money for your child’s college tuition and avoid heavy debt later from student loans:

1. High-yield savings options
2. 529 plans
3. Roth IRAs
4. Brokerage accounts
5. Coverdell education savings accounts (ESAs)

If you want to get a head start on saving for your child's college savings plans, visit Credible's online marketplace to compare rates for a high-yield savings account. 

WHY COLLEGE STUDENTS SHOULD OPEN A HIGH-YIELD SAVINGS ACCOUNT

1. High-yield savings account

A High-yield savings account is an ideal place to store short-term savings and emergency funds. If your student is nearing the enrollment period, it’s important to keep your money in safe investment accounts.

"High-yield savings accounts offer safety and predictability," AdvicePeriod Partner Advisor Ray Prospero said. "They are the safest option for college savings, as they also offer FDIC insurance protection." 

Using these as your college savings plans means you’ll still have your money even if your bank goes belly up.

Besides your education savings account, you can also save extra cash with a high-yield savings account, which earns rates that are much better than the national average of 0.04% APY, according to the FDIC. Compare multiple high-yield savings options by using an online marketplace like Credible.

2. 529 plans

Other investment options include a 529 plan, which is an account that allows you to save for college with potentially better returns than if you put that money in a savings account.

"529 plans offer several tax advantages for college savings," Romero said. "The money grows tax-deferred, and if they are used for qualified higher education expenses, the withdrawals are also tax-free."

Since the enactment of the Secure Act of 2019, qualified education expenses now include more than just college expenses, such as: 

• Private elementary
• Secondary schools
• Religious schools
• Homeschooling
• Apprenticeships
• Student loan repayment

Some 529 plans include a prepaid tuition option that allows you to avoid future tuition hikes by paying today’s tuition rates upfront. According to FinAid.org, tuition rises about 8% per year, which means the cost of tuition doubles every nine years. You can achieve much more savings through a 529 prepaid tuition plan if you can fund at least part of your child’s tuition while they are young.

But despite the tax advantages, the biggest drawback to 529 plans is the lack of flexibility – you must use the funds for qualifying education expenses to take advantage of these benefits.

529 COLLEGE SAVINGS PLANS: WHAT TO KNOW AND WHAT HAS CHANGED 

3. Roth individual retirement accounts (IRAs)

Like 529 plans, Roth IRAs offer tax-deferred growth and tax-free withdrawals. However, Roth IRAs may provide more flexibility because you aren’t limited to using the money strictly for educational institutions. Once you've started saving your child’s college fund in a Roth IRA and end up with a surplus, you can hold the extra money in an account for your retirement and withdraw it penalty-free once you pass the age threshold.                                            

"While withdrawals made before age 59, and one-half usually come with a 10% early withdrawal penalty, any withdrawals made for higher education expenses can be exempt, so long as they are made on behalf of an account owner, their children or grandchildren," Prospero said.

4. Brokerage account

While traditional brokerage accounts are taxable, they are still great investment options for those saving for college tuition by giving access to most investments you would like to buy or sell. Your investment planning can including putting your money in many things such as stocks, mutual funds, bonds, currency and futures. 

"By investing in securities, the potential for account growth is greater," Prospero said. "However, so is the risk of loss. "It's imperative that the account is invested in line with the account holder's risk tolerance, time horizon and objectives."

If you don’t wish to risk suffering a loss, a high-yield savings account is a more secure option. Find a high-yield savings option that best fits your needs at Credible.

OPENING YOUR FIRST BROKERAGE ACCOUNT: 5 TIPS FOR FIRST-TIME INVESTORS

The bottom line

529 plans are a popular way to save for your child’s college tuition, but they aren’t the only game in town. Other types of investment accounts allow for tax deductions for many qualified higher education expenses, offer higher yields or are more flexible than 529 plans. 

Each of the above asset locations offers unique benefits and tax considerations. As you work through your tuition planning, keep your goals and risk tolerance in mind. 

For example, a brokerage account may offer the potential for higher gains but also higher exposure to risk. On the other hand, you can find a high-yield savings account at Credible that provides a secure place to stash your money, with higher APYs than a traditional savings account.

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