For generations, saving for college was not a concern for parents, grandparents, or even students themselves, but as times have changed, it is now more critical than ever. According to the Education Data Initiative, the average cost of college in the United States is $36,436 per student per year, including books, supplies, and daily living expenses.
While student loans are still an option for many, student borrowers pay an average of $2,186 in interest each year, and the average student borrower spends roughly 20 years paying off their loans.
Despite those statistics, many parents and grandparents still struggle with the value of saving for college, and the unpredictability that comes with the decision. What college or university would my child choose to attend? What would the actual cost entail and how much should I save? What if my child pursues a trade school or nothing at all? Then you have families that desperately want to save but it’s unattainable due to their current financial circumstances.
With September being National College Savings Month, we at the Ohio Department of Commerce want to encourage families to start thinking about ways to save for higher education.
There are many options to choose from and I want to remind you that there isn’t a right or wrong decision, but each account or plan does have its own unique pros and cons.
• Savings Account: Many parents choose to contribute funds to a savings account due to the familiarity and ease of use, however the return on any contribution is minimal. Something to note, savings account funds can be used for any purpose without penalty, which can be beneficial if your child decides they don’t want to pursue higher education. The money in the account can be used for another financial goal of yours, or it could be gifted to your child.
• Custodial Account: A custodial account is a savings account that you, the parent/guardian, control for a minor until they reach legal age, which is usually 21 years old. Custodial accounts don’t have the same tax advantages as other savings plans, but withdrawals don’t have penalties if the funds are used for the benefit of the child, and any return that your money earns in the account is taxed. There are no annual contributions limits or household income restrictions, but the beneficiary on the account cannot change. Something to keep in mind is the money within the account counts as assets for your child, which could reduce their eligibility for financial aid.
• Roth IRA: While a Roth IRA is primarily a way to save for retirement, some of its benefits may make an appealing choice to save for college. Contributions to Roth IRAs are made after taxes, and withdrawals are tax free after you turn 59 1/2 years old. Roth IRAs have an annual contribution limit of $6,000, however that contribution limit could be reduced based on your income. The benefit of a Roth IRA is that you aren’t restricted to using the money for educational-related expenses, so it leaves options for you, as well as your child. The downfall to a Roth IRA is if you need to withdrawal money before you turn 59 1/2 years old. Generally, you’ll owe incomes taxes and a 10% penalty if you withdraw earnings too early. However, you can avoid the penalty, but not the income taxes, if the withdrawal is for qualified educational expenses.
• Ohio 529 Plan: College savings plans were created to help families save for whatever comes after high school. College savings grow tax-free, and when it’s time to use the money in your plan, it stays tax-free if you use it on qualified educational expenses. Also, If you’re an Ohio taxpayer, you’re also eligible for a state tax deduction, every year you put money into your plan. The current deduction is $4,000 per child, per year. This plan is an investment option, so you have choices, and there is a $25 minimum deposit to start a plan and no additional fees. The Ohio 529 Plan does have a small impact when it comes to financial aid, 5.64% of the account value is considered in that calculation if the parent is the owner of the account. Also, since the parent is typically the account owner, the beneficiary can be changed. So, if you open it for a child and they choose not to pursue higher education, it can be transferred to another eligible family member. Just note that you would be taxed on the earnings and the IRS would assess a 10% penalty. An additional incentive to an Ohio 529 College Plan is the ability to start it at any time and it’s easy for extended family and friends to contribute. For a complete overview of Ohio’s 529 Plan, visit the Ohio’s 529 College Advantage blog.
Any of these options would be a great way to invest in your child’s education, and if you really wanted to diversify your portfolio, you could pick multiple options. Investing in yourself and your family is one of the best gifts you can give, and it can have a lasting impact on the financial well-being of future generations.
Viktoria Jurkovic is the consumer affairs manager for the Ohio Department of Commerce’s Division of Financial Institutions.