In 2017, the average total expenses for a private college was more than $50,000. Per year! Imagine what that will soar to when my 3-year-old and 1-year-old are starting to look at colleges.  In fact, here’s a calculator to calculate how much you’ll need to save for college expenses.  Gulp.

That’s why college savings is so important now and why we can’t wait until they are applying to think about how we (or they) will pay for it!

In my hierarchy of savings needs, college savings if you are a parent goes right next to retirement savings (and just after debt repayment and emergency fund savings).  Even if you have debt, depending on the amount and kind of debt, you should be saving for your children’s education as early as you can.

When my siblings and I were born and for each birthday after that, my grandmother put some money in a bank account for us.  Now, I’m not talking big money.  $25 or so for each birthday. And we knew nothing about it until we were older.  While that money did grow a bit, it probably could have been better invested.

What are my college savings options?

When it comes to saving for your children’s education, you have several options.  As with anything that has options (like choosing pizza or rice cakes), some are clearly better than others.  And some depend on your situation.

Here’s a non-exhaustive list of your college savings options

1. 529 savings plans
2. Roth IRA
3. Coverdell Education Savings Accounts
4. Savings account
5. Bonds
6. Trusts

I’ll go through each option and give you the Yays! (pros) and the Nays! (cons) to each so you can decide!

529 plans

I am going to start with perhaps the most popular college savings option at the moment (besides regular old savings accounts) and that is the 529 plan.  529 plans are named after the section of the tax code where they are located, but that’s probably the least important tidbit of information I am going to share with you about 529 plans.

There are two kinds of 529 plans: college savings plans and prepaid tuition plans.

With college savings plans, you can open an account (normally an investment account) for a named beneficiary’s higher education expenses.  With prepaid tuition plans, you also open an account for a named beneficiary, but you lock in tuition rates so you know exactly what you are going to pay.  Not all states provide this option and the beneficiary is then limited to colleges within the list on the plan.

Yays!:

• You can change the beneficiary of the account
• There are usually age-based plans that make investing easier
• The contribution limits are high (every state is different)
• Your investment grows tax-free
• If a parent is the owner of the account, it will not affect the student’s financial aid eligibility much

Nays!:

• There is always risk with the stock market and you should be investing in age-based funds or at least less risky funds as the child nears college-age
• These plans are only for education and cannot be used for other expenses without being taxed and penalized.  So, if your child decides not to go to college or receives a full scholarship, you would need to change the beneficiary in order to take full advantage of the account

Roth IRA

While the Roth IRA is not technically a college savings account, there is a clause in the law that allows for withdrawals for qualified educational expenses, so it can be an option. If possible, I’d leave your Roth IRA as a retirement account, but it is an option.

Yays!:

• The flexibility that you have with the Roth IRA if your child doesn’t need the money for educational expenses is the biggest advantage to this option.  You can then keep the money in the retirement account.
• Tax-free growth and very few restrictions on investment options

Nays!:

• If you don’t have another retirement strategy (401K, other investments, etc.), you can be seriously handicapping your retirement savings
• There are low contribution limits for IRAs that would not likely cover educational costs
• There are income limits to contribute to a Roth IRA

Read more about Roth IRAs here.

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts are similar to 529 plans in that they are plans created for educational expenses specifically.  However, you can only contribute $2,000 annually to a Coverdell account and only until the beneficiary turns 18.  Also, while 529 plans are only for higher education, you can use the money from Coverdell accounts for primary and secondary school costs as well.

Yays!:

• Diverse investment options
• Tax-free growth
• Can be used for primary and secondary education expenses

Nays!:

• $2,000 annual contribution limits
• Can only contribute until beneficiary turns 18 years old
• Changing beneficiaries can be tricky

Savings Account

More than 60% of people have their children’s education savings in savings or checking accounts.  So, it is a popular option.  You can open a savings account specifically for educational expenses or save money in your existing savings account.  The problem with using your existing savings account is the temptation to use that money for other expenses.

Yays!:

• Easy access to money (although this is also a nay!)

Nays!:

• Tempting to tap into when other needs arise
• Normally has very low interest rates and won’t keep up with inflation
• Very little to no tax benefit

Bonds

Did Aunt Sally or Grandpa Joe buy you savings bonds for your birthday? These used to be a fairly common gift for children but with the super low interest rates many people have stopped using them, and with good reason.

Yays!:

• Flexibility, I guess

Nays!:

• Low returns
• Little to no tax benefit

Trusts

Have you ever heard of an UTMA or UGMA account?  These are trusts where you put money if your child’s (or another minor’s) name and once they come of age (depending on the state between ages 18 and 21) they are able to access it.  Careful, though, they have unrestricted access at that point, so while you may have wanted the money to go to pay for college, Joey could be thinking about a backpacking trip through Europe with his girlfriend.

Yays!:

• There are some tax advantages to the person who creates the account
• The money can be used for purposes other than educational expenses (also a nay!)

Nays!:

• This one can cause a big hit on financial aid eligibility for the student since the assets are in his/her name
• No tax benefits

Prioritizing College Savings

No matter which college savings option you choose, the most important thing to do is to include college savings in a  realistic budget and make it a priority. While you may think that your child should work to support himself through college, I don’t think any parent wants their child to leave college with the burden of hundreds of thousands of dollars of student loan debt.

So, do your homework and choose the best option(s) for you!