College is expensive in North America. Many people rely on student loans. However, student loan programs are changing rapidly. We don’t know what is in store for them for the future. Moreover, starting adult life saddled with student loan debt makes life more challenging. It’s best to start saving for education sooner rather than later.
Best Accounts to Save Money for Higher Education
Of course, you could simply put money into a savings account and withdraw it when it’s time for college. However, that’s not the best use of your money. Instead, you should take advantage of the different savings programs. Specifically, you want to look for savings accounts that help you maximize your investment while also giving you benefits such as tax-free savings.
529 Plans in the US
One of the most popular options in America is the 529 Savings Plan. This is a great option for parents who want to set aside money for their children’s college funds. Parents can invest the money tax-free. The child must use the money for tuition or other college expenses, such as college textbooks. When they withdraw the money for those purposes, the funds are taxed, but the taxes are at the student’s income rate (which is typically lower than the rate for parents at the time of investing.)
Registered Education Savings Plan (RESP) in Canada
Whereas 529 Plans are the most popular college savings option in the United States, in Canada it’s the Registered Education Savings Plan. RESP in Canada is a type of account that gives parents a means to invest their money for their children’s higher education. They can even earn government grants through matching in this program. Like 529 plans, RESP accounts are tax-sheltered. They must be used for college costs.
Other College Savings Accounts
Most likely, you will want to save with a 529 Plan or RESP. However, there are additional options for college savings accounts including:
- Education IRA, which is similar to a 529 Plan but with more limitations. This is also called a Coverdell Education Savings Account (ESA).
- Custodial account, which is an account that an adult sets up for a child to receive when they turn 18 (or 21). However, they may or may not use it for their education
- Prepaid tuition, which locks in the price at the current rate of the institution. However, this means the child must attend that specific institution.
Tips for Saving Money for Higher Education
Review all of your options carefully. Not all savings accounts are created equally, including those for saving for college. For example, 529 plans are state plans and each state has slightly different rules from the others. Review the rules in your state. Similarly, there are different RESP accounts. Make sure that you know what the terms of your account are before you begin investing.
Your child’s college education is important. Start saving as soon as possible. College will be here before you know it.