Best College Funds: Where To Invest For Your Child's Future

The cost of college is rising, and it's never too early to start thinking about a college savings plan. There are several options for where to save for college, including 529 plans, Roth IRAs, savings bonds, and more. Here's an overview of some of the best college funds to invest in.

529 college savings plans

A 529 plan is a tax-advantaged savings account designed for education expenses. It is one of the most popular ways to save for college, offering both federal and state tax benefits when used for qualified education expenses. Earnings and withdrawals are completely tax-free when used for college.

There are no income restrictions on 529 plans. Anyone can open an account as long as they are a US resident, aged 18 or over, with a US mailing address, and a Social Security or Tax ID number. The beneficiary can be anyone, of any age, with a Social Security or Tax ID number, and can even be the same person who sets up the account.

There are several benefits to 529 plans. Firstly, they offer tax advantages. There are no income taxes due on earnings as long as the money stays in the account. Withdrawals used for qualified education expenses may be federal income tax-free and free of state tax too. Secondly, 529 plans are flexible. The account owner maintains ownership of the account and can make investment decisions and change the beneficiary if plans change. Thirdly, 529 plans have high contribution limits. In 2024, individuals can gift up to $18,000, or $36,000 if married and filing taxes jointly, per child, without these contributions counting towards a lifetime gift tax exemption. Additionally, contributions of up to $90,000 ($180,000 per married couple) per beneficiary in a single year are not subject to the federal gift tax. Finally, 529 plans can be used for a wide range of expenses, including tuition and fees, room and board, computers, and apprenticeship costs.

However, it is important to note that there are some restrictions to 529 plans. Withdrawals not used for qualified education expenses may be subject to income taxes and a 10% federal penalty tax. Additionally, there may be restrictions on transferring funds to another child.

Overall, 529 plans are a popular and effective way to save for college, offering tax advantages, flexibility, and high contribution limits.

Custodial accounts

One of the benefits of custodial accounts is that there is no limit to how much you can invest. The value of the account is also removed from the donor's gross estate. However, earnings and gains are taxed to the minor and are subject to the "kiddie tax", where unearned income over a certain amount for certain children through the age of 23 is taxed at the parent's rate.

It's important to note that once the student gains legal access to the account, they can use the money at their discretion, which may differ from the parent's original intentions. Custodial accounts are also counted as student assets on the FAFSA, which means they can reduce a student's aid package by 20% of the account value.

Savings accounts

One of the simplest ways to boost your savings is to open a high-yield savings account. These accounts pay interest on your deposits at much higher rates than traditional savings or checking accounts, while still offering the ability to make withdrawals at any time. The rates available on high-yield savings accounts are currently the highest they've been in years, making them one of the best short-term investments.

Another option is a certificate of deposit (CD). CDs will pay you a fixed rate of interest in exchange for committing money to the bank for a specified period. These investments can be a good place to park money that you don't need until a specific time in the future, such as next year's tuition fees.

If you're a parent, you might consider opening a custodial account for your child. These are brokerage accounts that are opened by an adult for a child and transfer to the child once they turn 18, 21, or 25, depending on state regulations. They allow for diverse investments in stocks, bonds, mutual funds, etc. and can be used to cover expenses beyond just college tuition. There is no limit to how much you can invest in a custodial account, and the value of the account is removed from the donor's gross estate. However, earnings and gains are taxed to the minor and are subject to the "kiddie tax".

Another option for parents is a 529 plan. These are tax-favored savings plans for college costs and are one of the most popular ways to save for education. They come in two flavors: as an investment savings account or a prepaid tuition plan. A 529 savings account allows you to invest in mutual funds or exchange-traded funds, with similar risk/return profiles to other stock-and-bond-based investment accounts. Prepaid tuition plans, on the other hand, allow you to ""lock in" tuition costs and avoid future increases.

There are several other options available for saving for college, including Coverdell education savings accounts, Roth IRAs, and U.S. savings bonds.

Investment apps

When it comes to investing in college funds, there are several investment apps that offer convenient and flexible ways to save for future education expenses. These apps provide an easy and accessible platform for investors to manage their college funds and work towards their financial goals. One of the most popular investment apps in this realm is Betterment.

Betterment is a robust investment app that offers a goal-based investment approach, making it ideal for saving for specific targets like college funds. The app provides a user-friendly interface, and getting started is straightforward. You can set up automatic deposits to build your college fund over time. Betterment offers a variety of investment portfolios, and you can choose the one that aligns with your risk tolerance and financial objectives. The app also provides helpful tools like tax loss harvesting, which can maximize your returns over time.

Another excellent investment app to consider is Acorns. Acorns takes a unique approach by allowing you to invest your spare change. The app rounds up your purchases to the nearest dollar and invests the difference in a diversified portfolio of your choice. Acorns offer two plans: Acorns Early, designed for families with tax-advantaged investment accounts, and Acorns Later, a traditional or Roth IRA. You can set up an UTMA/UGMA account for your child, giving them a head start on their financial journey.

If you're looking for an app with a comprehensive set of features, Fidelity is an excellent choice. Fidelity is a well-known name in the investment world, offering a robust app that provides access to a wide range of investment options, including stocks, bonds, mutual funds, and ETFs. You can open a 529 college savings plan account, which offers tax advantages and flexible investment choices. The app also provides valuable tools and resources to help you make informed investment decisions.

For those who want a more automated approach, a great option is the investment app CollegeBacker. CollegeBacker focuses solely on college savings and provides an easy way to set up a 529 plan. The app allows you to invite family and friends to contribute to your child's college fund, making it a collaborative effort. CollegeBacker also offers tools to estimate college costs and provides personalized recommendations to help you stay on track.

Finally, Stash is an investment app that stands out for its simplicity and ease of use. Stash lets you choose from a variety of themes and sectors to build your investment portfolio. You can open a custodial account for your child, and Stash offers a unique feature called 'Stash Coach,' which provides personalized recommendations and guidance to help you maximize your investments. The app also provides educational content to help you improve your financial knowledge.

These investment apps offer convenient and flexible ways to save for college expenses. They provide diverse features, from automated round-ups to collaborative family contributions, ensuring that you can find an app that aligns with your financial goals and investment style. Remember to research and compare the features, fees, and investment options of each app before deciding, and consider seeking professional financial advice to ensure your college fund investments are well-aligned with your specific needs and risk tolerance.

Scholarships

• Start early and make it a priority: Begin researching and applying for scholarships as early as possible, preferably during your high school years. The earlier you start, the more opportunities you will have to find and apply for a variety of scholarships. Make scholarship applications a regular part of your routine, and set aside dedicated time for this task.
• Cast a wide net: Don't just focus on the big-value scholarships. Apply for a diverse range of scholarships, including those with smaller awards. These smaller scholarships often have fewer applicants and can quickly add up, contributing significantly to your college fund.
• Focus on your strengths: Highlight your unique skills, talents, and accomplishments when applying for scholarships. Whether it's academic excellence, athletic prowess, leadership qualities, or community service involvement, showcase your strengths and how they align with the scholarship criteria.
• Pay attention to essays and interviews: Many scholarships require essays or interviews as part of the application process. Take the time to craft well-written essays that showcase your personality, passions, and goals. Prepare thoroughly for interviews, as they can be a deciding factor in the selection process.
• Seek help and guidance: Consult with your school counsellors, teachers, or mentors who can provide advice and support throughout the scholarship application process. They may be aware of scholarships that align with your interests and strengths and can offer valuable feedback on your applications.
• Be persistent and don't give up: Applying for scholarships can be a competitive and challenging process. Don't get discouraged by rejections, as they are an inevitable part of the journey. Stay persistent, continue refining your applications, and seek feedback to improve your chances of success.

Frequently asked questions