The best way to save for college

Every parent wants to position their children for long-term success in life. Still, the best way to do that is through education and college degrees. But the biggest problem is the current price of college education, which is just getting more expensive each year. The USA is drowning in student debt which is currently around $1.3 Trillion. A lot of new graduates are spending more than 30% of their salary just on college payments. Some of them are paying off these loans for decades and you don’t want your kid to be in that kind of situation.

The best way parents can help is to start saving for their kid’s college from the earliest age. There are a few different options and this article will help you decide what is the best option(s) for you and your family.

When to start saving for college?

The sooner you start the better; ideally right after the child is born to maximize the potential savings and compounding interest. Also, it is never too late to start, even if your kid is going to college within a few years. There is one type of investment where parents were able to save for college in less than 3 years and we will show you that.

How much to save for college?

The average cost of college in the USA is $35.000/per year. This cost has tripled in the last 20 years. Every year costs are increasing by 6.8%. Also, there are big differences in the costs depending on the type of college - public or private. Average public college costs $25.000 per year for a 4-year program. The average private university costs a total of $54,000 per academic year.

Another way to look at college savings is the “one-third rule:

• A third of college costs should come from the savings
• A third of costs should be covered by earnings while the child is attending college.
• A third of costs should be covered by student loan

Probably a few years before college, your parents will be able to predict which type of college the child is most likely to attend (private vs. public, in-state vs. out-of-state).

Balance savings and investments allocation

The biggest problem when saving for kids college is how to find the balance between risk and reward when investing that money. If you want higher returns, that usually comes with higher risk. If you choose less risky (or not risky at all) investments by keeping money in cash, inflation will eat the value of your money. So, the balance is of the essence here.

Risk is managed through asset allocation - you put your savings into different types of investments. You can always change allocation based on the situation and the child’s age. For example, if you start saving as soon as the child is born you can choose more aggressive investments which could lead to more rewards. A few years before a child is going to college you will probably shift to less-risky options such as bonds, or cash.

Savings and Investing Options

1. 529 College Savings Account

529 College Savings Account, as its name says, is the special account that you can use to save for the child’s college education. The main benefit of this account is that you can withdraw funds for college expenses tax-free. It is one of the best ways to save money for college. There is no annual contribution limit. There are maximum limits for this account, but it is pretty high - depending on the state maximum limit can be from $235.000 to $529.000. Of course, there are some drawbacks to this account that you need to be aware of: if for any reason you spend money on anything else besides higher education, you will pay regular income tax + a 10% penalty fee. Also, investment choices in these plans can be quite limiting to stock funds or bond funds. Currently, there are over 14 million 529 accounts in the USA.

2. Custodial savings account

A custodial savings account is just a regular saving account that parents are controlling on behalf of the child. After a child is 18 or 21 funds are transferred into the child’s custody. A custodial account is more flexible than 529 accounts in terms of what you can spend money on and what you can invest in.

3. Prepaid tuition plan

This option could save you a lot of money but it is also very restrictive. Some colleges (public and private) allow you to buy a year’s of tuition in advance at the current price, so you are protected from inflation and rising prices. The biggest problem with this option is that children won’t have much freedom when it comes to picking up college.

4. US Savings Bonds

If used to pay for college, US savings bonds offer tax-free interest savings. Bonds offer very low interest and yield, but it is still better than holding the cash.

5. Invest in Bitcoin and other cryptocurrencies

At the beginning of this article, we talked about how the balance between the risk/reward of the investment is the most important when saving money for the kid’s college. The relatively new way is to invest part of the money into cryptocurrencies such as Bitcoin or Ethereum. A lot of people who invested in Bitcoin early enough (2015 and earlier) are now millionaires. Over the last 5 years, Bitcoin growth was much higher than any other investment asset

To illustrate to you how good investment Bitcoin is check the below example:

If you were investing $100 per week into Bitcoin in the last 3 years, you would invest a total of $15.700, which would now be worth around $74.470. That would be enough for you to pay your child a 3-year program in a public college. If you keep the same money ($15.700) on the savings account you would get a few dollars of interest.

If you invested $15.700 into stocks/bonds, in the best case scenario you would now have around $20.000.

Also, Bitcoin is not the only cryptocurrency option to invest in. There are many others, so make sure to check our educational pages to learn more.

With the HODLify app you can open an account within minutes and invest in crypto on your child’s behalf. Also, your friends and family can send crypto to your child as a gift with personalized messages. This way your child will get a meaningful gift that can grow over time with a nice personalized touch.

*This article is not investment advice. Before investing, consult with your financial advisor.