Should you save for your kids’ college education in your own accounts, or put college savings in each child’s name?
Getting started saving for college can seem daunting.
You have to decide how to save, how much to save, and how to invest. You may choose a tax-deferred plan or any other investment.
Before you get far, however, the first thing you need to decide is whether you want to save in your own name, or in the names of your children.
Here are some pros and cons to consider when saving for your kids’ college education:
3 reasons to put college savings in your child’s name
1. College savings in their own names helps kids be involved in planning and preparing for college.
Teenagers can put a portion of earnings and cash gifts in college savings to help it grow more quickly.
Contributing to college savings themselves gives them a stake in the project. A child who knows he or she wants to go to college, and works hard to help save money ahead of time to do so, is more likely to study hard after classes start.
2. The money is under the child’s control.
Depending on the type of savings, the child may decide to use it for a worthy cause other than college, such as buying a home or starting a business.
In addition, if you intend for certain savings to be for a child, and something happens to you, the savings are already his.
3. Your child is probably in a lower tax bracket than you are.
Up to $2,000 of a child’s interest or other unearned income is taxed at the child’s lower rate.
4 reasons to keep college savings in your own name
1. Savings in the child’s name can reduce his or her eligibility for financial aid.
This is the most frequently cited reason for not putting savings in the child’s name.
When financial aid is calculated, a larger percentage of the child’s assets are considered to be available for paying tuition. This is generally true even for custodial accounts you keep for your minor children.
2. You may not want the money to be under a young person’s control.
Not everyone is capable of making the wisest decisions by age 18 or 21. If you help your child save money for college, and he buys a new car instead of enrolling in college, what then?
3. You may want to use alternative methods of saving for college.
You could start a side business, invest in real estate, improve your own career skills, or take other nontraditional paths to getting ready to help your child get through college.
4. Life is full of surprises.
If you put money into your child’s name, it’s theirs. You can’t borrow from the savings account.
If you lose your job or suffer any other financial crisis, and you don’t have an adequate emergency fund, you may wish you had kept things more flexible.
Even if you don’t need the money, you may want more options later.
For example, if you have more than one child, both may not need the same amount of money for college. One child may go to community college, while another applies to law school.
How old do you think a child should be when he or she starts taking an active role in college planning?