3 Questions You Must Answer Before Investing in a College Fund

The second question you need to ask is: How much do I need to save? An article by Mark Kantrowitz on SavingForCollege.com suggests that one-third of a four-year program’s tuition and fees is a good place to start. Right now, that’s about $45,120 for a private nonprofit college, $24,266 for a private for-profit, and $12,533 for an in-state public college. That means socking away $100 to $400 per month over a 10-year period.

Third question: Is there a best way to invest? ​Yes, but it all depends on you and your goals. Here are a few options. (Keep in mind this is not financial advice. Please consult a financial expert on what is best for you and your situation.)

The most well-known is a 529 account named for the tax code, 26 U.S. Code §529. These are qualified tax-deferred college savings plans or prepaid (in-state) tuition plans, with many to choose from. You invest your post-tax money through the plan in mutual funds, exchange-traded funds or other similar investments. The money grows tax-deferred and can be withdrawn tax-free for use on qualified higher education expenses. You can contribute up to $17,000 per year (the gift limit) before other financial consequences kick in. States also have limits of total contributions that vary up to $550,000. Please check with your financial consultant to see what effect this will have on your student’s ability to get other financial aid.

Education Savings Accounts (ESAs), one of the first college savings methods passed by Congress, allow you to save up to $2,000 per year per child. From birth to 18 years old, that’s $36,000 — not including interest. Unlike 529s, ESAs can also be used for K-12 education costs, which is great if private school is being considered. There are income limits for those who participate in these plans.

Uniform Gift/Transfer to Minor Accounts (UGMA/UTMA) are custodial investment accounts set up for minor children. Contributions can be spent on anything the children want when they are no longer minors. There are no tax benefits to the contributor, and it counts as income (or losses) on the child’s tax returns.

Brandon Turner from Bigger Pockets proposed the most unusual savings vehicle I have heard of, albeit not the cheapest or simplest. Turner bought a four-unit property in his 1-year-old daughter Rosie’s name. He fixed up the building and rented out the units. When his daughter reaches 18, she can sell the property for three times what he bought it for — and the tenants will have paid for all of it.

It is awesome to be able to help your family this way, and as you can see, if you are able, there are many ways to do it.

Share your experience: What are you doing to save for educational expenses for your children and grandchildren? Let us know your thoughts in the comments below.