Five financial tools to help you meet your college savings goals

By Joeseph Sheils, SVP, Retail Banking

Student loan debt has eclipsed the $1 trillion level in the United States. Two-thirds of students graduate with an average of $35,000 in debt. If putting your kids through college debt-free is one of your financial goals, there’s no time to waste in getting started saving. According to College Illinois, the average annual cost of tuition and fees for in-state students at a public university in Illinois for the 2014-2015 school year was $13,983. In addition, the average annual cost of room and board is $10,138, according to The College Board. If your child is currently 9 years old and you want to save enough money for them to attend college debt-free when they turn 18, you’d need to save nearly $100,000 or $625 per month to pay for a four year in-state degree. This assumes an annual cost of college inflation rate of 3.7 percent (as cited by The College Board), and a 7 percent rate of return on your money (which could be accomplished by investing your money in a well-balanced portfolio of stocks and bonds).

Balances and Expenses by Year

 Here are five savings tools that can help you accumulate enough money to pay for your kids’ college educations without taking on expensive student loan debt:

1. Section 529 plans have become one of the most popular college savings tools for American families. Operated by states and educational institutions, these plans offer tax-deferred growth as well as tax-free distributions if the money is used to pay for qualified education expenses. There are two different types of 529 plans: prepaid tuition plans that enable you to lock in future tuition at today’s rates, and investment savings plans that allow you to seek market returns on your contributions by investing them in securities, mutual funds and exchange traded funds (ETFs).

2. Coverdell Education Savings Accounts (ESAs), formerly known as Education IRAs, are similar to 529 plans, with potentially lower costs. Also, ESA funds can be used to pay for K-12 expenses as well as college. The biggest drawbacks of ESAs are the income limits that apply (if you earn more than $110,000 if you’re single or more than $220,000 if you’re a married couple filing jointly, you can’t open an ESA) and the relatively low contribution limit of only $2,000 per year. Therefore, some families use ESAs as a supplemental college savings tool in addition to a 529 plan.

3. Custodial accounts – also known as UTMAs and UGMAs – are used by parents and grandparents to contribute money toward their children's and grandchildren's college educations. They don’t offer tax-deferred growth like 529 plans and ESAs, but their earnings are taxed at the child’s lower rate. Also, there are no annual contribution limits to custodial accounts. One potential drawback is that the child assumes control of the account when he or she turns 18 or 21 (depending on the state) and doesn’t have to use the money for college.

4. Zero coupon municipal bonds pay out the full face value upon maturity, instead of making periodic interest payments like most other bonds. By structuring a zero coupon bond’s maturity date to coincide with the time when your child heads off to college, you can have a nice lump sum of tax-free money available to help pay for college expenses.

5. Roth IRAs are usually thought of as a retirement savings vehicle, but the unique features of Roth IRAs also enable you to use them to save for college. In most situations, you can withdraw Roth IRA contributions tax- and penalty-free at any age and for any reason, including meeting college expenses. This could make a Roth IRA a good college savings vehicle to supplement a 529 plan, as well as help you save for retirement.

The cost of a college education is rising faster than the rate of inflation. Therefore, by the time your kids head off for school, your tuition bills could be significantly higher than even today’s inflated college costs. Investigating these college savings tools today can help prepare you to meet those costs.