Multiple Kids? Find the Best College Savings Plan for Your Growing Family

When you bring your new baby home from the hospital, college might seem a long way off. But that doesn’t mean you should move college savings strategies too far down your priority list. After all, the best way to manage student loan debt is to avoid it in the first place.

Admittedly, building a college fund can feel like a daunting financial challenge. The National Center for Education Statistics reports that the average cost of tuition and fees can range from over $9,000 annually for in-state residents at public universities to more than $32,000 per year at private colleges. And that doesn’t even include housing, food and transportation! According to finaid.org, if inflation keeps up, children born today could end up paying up to four times the current price for tuition.

But there’s good news: There are several methods that can help you get started saving now. 

How much should you save? 

When it comes to saving for college, every little bit helps. With multiple financial goals to juggle, you might not plan to pay for 100 percent of your child’s college costs. Start by setting a realistic goal and set aside a set amount of money each month. By the time your child is 18 and off to college, you’ll have a good start. The goal is to spread the cost of college over a lifetime to make it more manageable. So, maybe, one-third comes from past income, another third comes from current income at the time tuition is paid and the last third from future income, through student loans that you or your child can pay back later. Check out the cost of college to see just how much you might want to consider saving. 

How do I save for multiple children? 

With the cost of higher education continuing to rise, saving for college can be hard for parents with just one child. If you have multiple children, it might feel impossible. It’s important to start small and get saving as soon as possible — for each of your children!

Fortunately, there are several ways you can begin saving for your children. With several savings options available, you might ask yourself “How can I be sure I am saving enough for each of my children?” One way to ensure that you’re saving for each child could be to open a different account for each of your children. When the time comes to use the funds, it’ll be easier to know you are using the funds for that specific child and not dipping into funds you’ve set aside for another child. However, fees could be greater if you’re paying account fees on each account.   

What are your savings options? 

529 Savings Plans 

These plans are specifically designed to help families save for college. Like a 401(k) or Individual Retirement Plan (IRA), 529s work by investing your contributions in stocks, bonds and mutual funds. These state-sponsored plans have the big advantage in that your earnings grow tax-free and withdrawals won’t be federally taxed if they’re used to pay for college tuition, books, room and board, or other qualified education expenses. Generally, the funds from a 529 can be applied to most accredited colleges and graduate schools, including professional and trade schools.

529 plans don’t have annual contribution limits, but there are overall aggregate limits, generally a 529 balance cannot exceed the total expected cost of college expenses. 529 plans also have a limited impact on financial aid eligibility because the plans are not considered parental income but are instead categorized as a parental asset.

Anyone can contribute to these plans, like grandparents, aunts and uncles. There are several options for 529 savings plans so compare the terms closely when you’re shopping for one.

Infographic: Find the Right College Savings Plan for Your Family

My child has decided not to go to college, what do I do with my 529 plan?

You have a few options:

1. Transfer the beneficiary to another child or another family member to use for qualified education expenses.
2. Withdraw the money. However, if you’re pulling the money out and not using it for qualified education expenses, you’ll pay a 10-percent penalty on top of taxes on the gains.
3. Wait and see. There is no rush, you can simply let the money sit in the 529 until you make a decision on how you want to proceed.
4. Thanks to the Secure Act 2,0 (passed December 2022), after 15 years 529 plan funds can be rolled into a Roth IRA for your child, subject to annual contribution limits and an aggregate lifetime limit of $35,000. 

Coverdell Education Savings Account (ESA)

Like a 529 plan, an ESA invests your contributions in an array of stocks, bonds and mutual funds. These earnings also grow tax-free. They’re free from federal tax when used for qualified educational expenses and are considered a parental asset when it comes to applying for federal financial aid.

One difference between a 529 plan and an ESA is that ESAs can be used to pay for a variety of educational expenses, from kindergarten to graduate school, including both private and public schools. Contribution limits ($2,000 per year) are based on income limits and are phased out for taxpayers with an adjusted gross income above a certain level. Once the account beneficiary turns 18, you can no longer contribute to the account and the account must be fully withdrawn by the time he or she reaches 30. 

My child has decided not to go to college. What do i do with my ESA? 

1. Transfer the beneficiary to another child or another family member to use for qualified education expenses.
2. Withdraw the money and pay the 10-percent penalty as well as income tax on the gains. If the entire fund is not used before the beneficiary turns 30, you’ll be forced to either roll the account over to another child, tax and penalty-free, or cash it out and pay a 10-percent penalty and income tax on the gains. 

Uniform Transfer to Minors Act (UTMA)

When you open an UTMA account, you’re simply holding onto assets as a custodian for a minor child. Essentially, an UTMA is designed to pass a large sum of money, real estate or other inheritance to a minor. Once your child reaches adulthood at age 18 or 21, depending on the state, the control of the UTMA account is completely and permanently transferred to them. An UTMA account does not guarantee that funds will be used for college expenses. Once the beneficiary is of legal age, they can use the funds any way they want.

Unlike a 529 Plan or an ESA, an UTMA account is not a tax-deferred account. For financial aid purposes, the assets in an UTMA account are the child’s and may affect the amount of financial aid they’re eligible to receive. Essentially, an UTMA account is a way to allow your child to own assets once they reach adulthood. 

Roth Individual Retirement Account (Roth IRA)

Likely when you think of a Roth IRA, you think retirement. A Roth IRA is a great method to save for retirement, but it can also be a tool to help you pay for your child’s college. Unlike a 529 plan or an ESA, which can only be used to cover qualified education expenses, a Roth IRA can be used for both college expenses and retirement income. This could be beneficial if your child doesn’t go to college or if they receive scholarships to pay for their college education, then the funds could still be used for retirement.

Deposits into Roth IRAs do not receive a tax deduction; however, they do grow tax-deferred. And when used specifically for qualified educational expenses, including tuition, fees, books and room and board, a Roth IRA is exempt from withdrawal penalties. 

Dream Big!

You want the best for your kids and have hopes and dreams of what they might be able to achieve. We know you’d do anything to help them get there. It’s never too soon to start setting money aside for college education. Even small amounts can grow over time to make a big difference. Connect with a Farm Bureau agent and learn more about college funding options.