Education Loan Finance

When & How to Start a College Fund for Your Child

Thinking about your child’s future can be exciting but it may also cause worry when you think of the costs associated with it. Considering starting a college fund for your child is a great first step. 

The average cost of college for the 2020-2021 school year was $26,820 for full-time in-state students at public universities and $54,880 for private universities. With these high costs it’s no surprise that many students use student loans to cover the costs. 

The average student loan debt carried by new graduates for the class of 2020 is $37,693. With all the costs, it’s not uncommon to see parents paying for college for their students, or at least a portion of the costs. Because of the benefits of going to college, job opportunities and higher earning potential, some families also consider starting a college fund for a baby.

When to Start Saving for College 

The ideal time to start saving for a child’s college education is as soon as possible. Starting a college fund for a baby gives the money the most time to compound. Parents should set savings goals and include a monthly contribution in their budget if possible to help stay disciplined in achieving the goals. 

However, parents that are not on track to meet their own financial goals may consider waiting to start a college fund. Before starting a college fund, parents should consider these financial milestones:

  • Saving an emergency fund with at least three months of expenses. 
  • Paying back debts, especially if you have your own student loans. Pay student loans before starting a college fund.
  • Investing at least 10% of income in retirement accounts. 

If you want to begin saving a college fund before accomplishing these goals, consider beginning with small contributions and increasing them as your budget allows.

Best Ways to Start a College Fund for Parents & Guardians

The first step to decide how to start a college fund is to decide how much you will save. The amount you want to save can help determine which account is better for you, since some accounts limit how much can be saved per year. 

A parent or guardian can also open multiple accounts for each child to take advantage of different savings limits, tax benefits and account features. With each account, there are different rules, income limits, tax benefits and tax consequences, so be sure to keep an eye out for these. 

Whichever account you decide to use, starting a college fund for your child is a great way to start their financial future off so they may graduate with little to no debt. Here are some accounts to consider when starting a college fund for your baby.

529 College Savings Plan

There are many options available when you are trying to decide how to start a college fund. One common savings plan is a 529 plan. A 529 plan is named for the IRS section that allows an account to be set up and grow tax free to pay for the qualified education expenses of the beneficiary. 

States offer 529 plans, and you do not always have to be a resident of a state to take advantage of the plan, although there may be state tax benefits for residents. There are two types of 529 plans:

  • Prepaid plans: allows a person to buy college credits for a beneficiary, so when the child enters college, those credit hours are already paid for.
  • Savings plan: a tax-advantaged account where the money is invested and grows until the child is old enough to attend college.

If you are wondering how to start a 529 college fund, here are some things to keep in mind:

  • Find out if your state offers a 529 plan and whether contributing to it provides any tax benefits.
  • Some plans offer you the option to decide how your funds are invested, and others do not. Be wary of plans that freeze your options or automatically change the investments based on the child’s age, as they do not give you as much control over your investments.

Here are a few pros and cons of 529 College Savings Plans:


  • 529 plans often have higher contribution limits than other plans.
  • Money grows tax-free. 
  • The plan can generally be transferred to another family member if the original beneficiary does not use it. 


  • You may have to begin saving early to give the money enough time to grow.
  • Only qualifying expenses can be withdrawn. Withdrawing funds for expenses that are not qualified may require you to pay taxes on the withdrawal

Coverdell Education Savings Account (ESA) or Education IRA

A Coverdell Education Savings Account, also known as an Education IRA, is an account that allows you to invest in options including stocks, bonds and mutual funds to cover educational expenses. 

The money can be used for tuition, mandatory fees and required books and supplies in college or private school for kindergarten through 12th grade. With this type of account, you can contribute post-tax money up to $2,000 per year per child if income guidelines are met. Funds can be withdrawn tax-free for qualifying expenses.


  • Money grows tax free. 
  • You can choose from a variety of investment options. 


  • Income restrictions limit contributions to this type of account. To make the full $2,000 contribution in 2021, joint filers cannot earn more than $190,000. Once the joint income reaches $220,000 contributions cannot be made.
  • The beneficiary must use the money by the time they turn 30 years old.
  • Low contribution limit per year.   

Uniform Transfer (UTMA) or Gift to Minors Act (UGMA)

If you are considering saving money for a child to use after college, you may be interested in opening a UTMA or UGMA account. These accounts allow an adult to be in charge of the assets until the child reaches either the age of 18 or 21, depending on the account. 

These accounts can hold investments like stocks, mutual funds and bonds. One important distinction between UTMA and UGMA accounts is that UTMA accounts often accept assets aside from typical financial investments, for example, real estate. Since these accounts are not specifically for college savings, the money can be used however the child chooses once they reach the age of majority.   


  • These accounts offer more flexibility in terms of how and when the money can be spent.


  • May lower the amount of financial aid the beneficiary is eligible for since the accounts count as an asset when applying for financial aid. 
  • Once the beneficiary reaches the legal age for the account, they can use the money however they choose, which could allow frivolous spending. 

Individual Retirement Account (IRA)

When you begin to think about starting a college fund, a retirement account may not be the first option that comes to mind. But in some cases, IRAs and ROTH IRAs allow a person to withdraw funds for qualified college expenses without the 10% penalty for early withdrawals. 

The owner of the account can use the funds for their own education, their spouse’s education, children or grandchildren. There is an important distinction to note between using money from an IRA and ROTH IRA. If the money is withdrawn from a traditional IRA, income taxes will be owed since IRA’s are funded with pre-tax money. 

Money withdrawn from a ROTH IRA has already been taxed, so taxes are only due when the ROTH IRA is less than five years old and contributions and earnings are being withdrawn. In these cases, taxes will be due on the earnings withdrawn. 


  • Using an IRA as a way to save for college will not count in the calculations for the student’s financial aid need, thereby not reducing the amount of financial aid the student may receive. 
  • If a student earns money and begins to save in a ROTH IRA, then they end up not needing the remaining money in the account, they will have a great start on their retirement savings. Some college savings accounts can have penalties if not all the funds are used. 


  • If a parent is planning to use their own retirement account to pay for their child’s college expenses, this could be detrimental to their retirement savings.
  • Other college savings accounts allow the money to grow tax-free, which is not always true for IRAs.

Learn More: Using a Roth IRA to Pay for College

College Savings Tips for Future Students

No matter what methods a parent uses to save for college, it is beneficial to teach your student about the power of smart money management. Students can save for college in a variety of ways, including:

  • Focusing on having a stellar high school “career” and excelling academically or in athletics to be eligible for scholarships.
  • Setting realistic expectations of costs and creating a budget so both the parent and child will be on the same page of what costs each will be responsible for.
  • Getting a job in the summer and saving for future school expenses.   
  • Taking AP or dual enrollment classes while in high school to earn college credits at a much lower cost. 
  • Setting savings goals for themselves, and practicing working toward those goals.

Make Up the Difference With Student Loans

With the rising costs of college, it can be challenging to cover every expense. If your student needs an extra financial boost, student loans may be an option to cover extraneous expenses. 

ELFI offers private student loans to help students pay for school, with affordable rates and flexible terms.* You also won’t have to pay an application fee or an origination fee, so you can focus your efforts on important college costs.

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