Skip to main content

Saving for Education from Kindergarten to College

Printer-friendly version
May 1, 2015

For most parents, one of their greatest desires is for their children to receive a quality education.  Such an education, which can begin as early as preschool and continue through college and graduate school, is the foundation for young people not only to become productive and knowledgeable members of society but to also achieve economic security and success.  In fact, statistics have shown that individuals with a bachelor’s degree earn a significantly higher income than individuals with only a high school diploma. 

Yet, for many families the financial cost of educating their children can seem very daunting.  Recent statistics reveal that a middle-income family with a child born in 2013 is expected to spend about $54,806 (adjusted for projected inflation) for childcare and education up to age 18.  The figures for the cost of a college education are even more dismal.  According to the College Board, the projected four-year tuition and fees (not including costs such as room and board, books, and supplies) at a private college with enrollment in 2015 amount to $134,600.  In 18 years, this figure jumps to $323,900.  For in-state resident students enrolling in a public university in 2015, the projected tuition and fees total $39,400.  Eighteen years from now, this number will have increased to $94,800. 

The College Board also found that for the 2014-2015 school year, private colleges experienced an average tuition increase of 3.7% while public universities had an average increase of 2.9%.  These rates of increase are higher than both the general inflation rate and the average increase in personal incomes.

Clearly, families with even one student face a tremendous financial dilemma in attempting to pay for K-12 education costs, as well as paying for a college education.  Fortunately, there are several investment vehicles available to help save and pay for the education expenses of students.  The more traditional education investment options to save for college are U.S. savings bonds, savings accounts, and taxable investment accounts.  In addition to these financial instruments, there are two more relatively recent options available to families – Coverdell Education Savings Accounts (ESAs) and 529 college saving plans.

Coverdell ESAs are the most flexible savings plan because, unlike other investment vehicles that only allow use of investment earnings for postsecondary education expenses, Coverdell ESAs allow families to use the money for a wide variety of educational expenses from kindergarten to graduate school.  Such expenses can include private school tuition, books and supplies, academic tutoring, special needs services, extended day programs, and even a computer for high school.  Coverdell ESAs do have an annual contribution limit of $2,000 per child and funding is prohibited once the student reaches 18.  However, withdrawals from the account are tax-free. 

529 college savings plans, which are named after Section 529 of the Internal Revenue Code that established the plans in 1996, are another popular investment choice.  These plans are state-sponsored and tax-advantaged.  California’s 529 college savings plan is called ScholarShare.  In California, up to $371,000 per beneficiary account can be contributed as long as the total balance of all accounts for that beneficiary is not more than $371,000.  Earnings made from contributions to a ScholarShare account are federal and California income tax-deferred.  Moreover, withdrawals from the plan to pay for qualified post-secondary educational expenses such as tuition, room and board, and books and supplies are federal and California income tax-free.  529 savings plans can be used to pay the expenses of any qualified college or university in the country.   

Given the number of investment options from which to choose, families can prepare themselves financially to meet at least some education expenses, whether their student is in kindergarten or in graduate school.  Indeed, with these expenses ever increasing and the recognized benefit of a college degree, participation in one or several of these investment vehicles should strongly be considered by every family.