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How to Start Saving for Your Child’s College Fund

Sending a child to college is a large financial expense for many families. As with many big expenses, getting a head start on saving will make it easier when the time comes to pay that first tuition bill. In this article, we’ll cover some options for New Mexico families to save for and finance a child’s education, including our LOV Foundation scholarship program.

Calculator and college application.

How Much Should You Save For Your Child’s College?

It can be hard to predict how much college will cost by the time your child is ready to matriculate, but here’s one way to estimate and set a savings goal:

The most recently available statistics, for the 2019-20 academic year, show that average tuition and fees (not including room and board) were $9,400 for public 4-year institutions and $36,700 for private nonprofit 4-year institutions.

You can use the 3x rule, which means that the average cost of college tuition usually triples in the 17 years between a child’s birth and college enrollment. So, that would be $28,200 for a public university and $110,000 for a private one. Multiply that number by four and then divide the total by the number of years left before your child’s college graduation. You can further divide it by 12 to gain a monthly target.

If the monthly target is more than you can comfortably afford to set aside, don’t worry. Every little bit helps, so just put aside however much you can budget for.

Types of Savings Accounts for College

Learn about the different types of college savings accounts so you can choose the best option for your family.

529 Educational Savings Plans 

A 529 plan is a tax-advantaged savings account that is supposed to be used for the beneficiary’s education expenses. 529 plans are available through each state, though you don’t necessarily have to choose one from the state you live in. However, contributions to New Mexico’s 529 College Savings Plan are 100% tax-deductible on your state income tax for New Mexico residents. When you choose the investment option for your 529 savings plan, you can use an age-based or enrollment date asset allocation within the plan to balance your risk and return.

Prepaid Tuition Plans

Also known as a “qualified tuition plan,” this is another type of 529 plan offered by some states (though not in New Mexico). With this type of savings account, you are essentially pre-paying for your child’s education at a public in-state university at today’s tuition cost. Qualified tuition plans have less flexibility than 529 investment savings accounts. There is usually a residency requirement for both the account opener and the beneficiary. And the funds can only be used for tuition and mandatory fees, not room and board fees for living on campus.

College students sitting in lecture smiling.

Coverdell Education Savings Plans

This college savings option is a trust or custodial account set up for paying qualified education expenses for the designated beneficiary. With Coverdell ESAs, qualified education expenses include private school tuition for elementary and secondary education, as well as higher education expenses. However, there are more limitations than with a 529 plan. Contributions to a Coverdell ESA cannot exceed $2,000 annually, and contributions must stop when the beneficiary of the plan turns 18 years old, and then the funds in the account must be fully distributed by age 30.

Custodial Savings Accounts (UGMAs & UTMAs)

These savings plans called Uniform Gift to Minors Act and Uniform Transfers to Minors Act can hold assets like cash, stocks, and mutual funds with the intent of using the funds for education costs. There are no contribution limits and the designated beneficiary (your child) gains access to the account at age 18.

Additional Education Financing Options

Saving for your child’s college education is a good move, even if you don’t end up saving for the entire cost. You can cover the rest of the cost with these other options:

Grants and Scholarships

College grants and scholarships can be awarded by a variety of sources and for a number of different reasons or achievements. Many academically or athletically-inclined students receive opportunities for grants and scholarships which will help reduce the amount they need to save and pay out of pocket when they get to college. Students can also receive grants and scholarships for excelling in a number of different extracurricular skills or niche hobbies, belonging to a certain religious or other identity groups, writing an essay, and so on. There are even websites specifically devoted to helping you search for relevant scholarships.

Happy smiling college students sitting at table with large window behind them.

Individual Retirement Accounts (IRAs)

You may think IRAs are just for retirement savings, but you can also use an IRA for qualified college expenses as long as those contributions have been made for at least five years before the funds start being used. Traditional or Roth IRAs can both be used for this purpose, with the difference of course being whether you pay taxes on the funds before you put the money into the account or not. With a Roth IRA, you will pay the taxes upfront and any money taken out within the appropriate time frame is tax-free. With a Traditional IRA, you will have to pay taxes on the money when you withdraw it.

Educational Trusts

Parents or, more often, grandparents, can establish an educational trust to fund education expenses for designated beneficiaries. These types of trusts are primarily used for high-income or high-net-worth parents or grandparents as part of a tax planning strategy to limit taxable estate funds. With these trusts, all the money must be distributed to the beneficiary by their 21st birthday. Not a super common route that people go, but it does exist.

Tips for Budgeting & Saving for Your Child’s College

Start saving as soon as possible. Of course, the sooner you start saving for your child’s college savings the better. There is no recommended age for when one should start thinking about saving for their child’s education; it really is a matter of your personal financial situation and what your intended goals are, but the earlier you start saving the longer those funds have to grow and build on interest.

Make college savings contributions automatic. Set up automatic transfers from your bank or checking account to your 529 savings account. A lot of 529 plans let you set up automatic contributions with as little as just $25 a month to start growing your savings slowly.

Save a little more when you can. When you receive or come into more money than you were expecting or planning to have, it’s always a good idea to take some of that unexpected cash and contribute a little more to your college savings plan. This could include bonus money from work, tax refunds, inheritances, birthday or anniversary gifts, significant sale of property or home goods, etc.

Father and daughter happy sitting on living room couch putting money into piggy bank.

Ask for contributions instead of gifts. Especially when kids are younger and may not need to receive more toys and games every birthday or holiday, you can ask family members and close friends to consider contributing to the child’s college savings fund in lieu of a new toy. Your child might have fewer toys each year but more savings for college costs later down the line.

Start early and take AP classes. Advanced Placement (AP) classes are offered to high school students, usually in grades 11 and 12, but sometimes 10 as well. These AP classes allow high school students to take college-level coursework before they even get to college and if the student achieves a high enough score on the final AP exam. Then they could earn credit for certain college classes and be eligible to skip some introductory classes once they get to college. Typically, AP classes are offered for subjects like English, History, Science, and Math.

Balance saving for college with other life costs. Planning for your child’s higher education costs and investing in their future is great to do, but it should be done in addition to and not at the expense of other financial priorities like saving for retirement or paying off debt. If you don’t reach your college savings goals, there are other financing resources and options to help as well.

Create a plan with a Financial Advisor. If you’re unsure of where to start with saving and planning for your child’s college costs, it’s always a good idea to meet with your financial planner or set up a consultation with a new financial advisor if you don’t already have one. They can help you better determine what the best type of savings plan would be for you, how much you should contribute and over what timeframe, how to manage college savings with other long-term savings goals, and more.

 New Mexico-Specific College Financing Resources

Learn about the opportunities available specifically to New Mexico residents:

Silhouette of graduate students wearing cap and gown against sunset background.

We are here to help you save for college!

At Del Norte Credit Union, we are committed to helping you realize a better future, whether that includes college or not. Learn more about the Del Norte LOV Foundation and Scholarship Program and schedule a consultation with a Financial Advisor today to start saving for college.

Our partnership with GreenPath helps provide guidance for successfully navigating a variety of financial challenges. In addition, our partnership with Banzai Financial Wellness provides our members with in-depth financial lessons that help you understand the financial topics that matter to you most.

We also offer personal savings accounts, including youth accounts. Not a DNCU member yet? It’s easy to switch! Check out these related blog articles:

Disclaimer: This article is for informational purposes only. For advice regarding your specific financial situation, please consult a financial planner or a trusted financial professional.