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Congrats on the New Baby! Now Save For College

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What were the first thoughts that crossed your mind as you held your beautiful, sweet newborn baby in your arms for the first time? I’m guessing that saving for your baby’s college tuition probably wasn’t on your mind as you did “skin to skin contact” or stared lovingly into your baby’s eyes. As tuition rates skyrocket (in one year, the tuition for my degree jumped 18%), you might want to start thinking about your child’s college savings plan as soon as possible, if not as soon as they’re born. You don’t have to fund it all in one year, but if you start now, time will be on your side.

Types of college savings plans

There are several different types of college savings plans. The most common ways to save for college education are by using Section 529 Plans, Coverdell Education Savings Accounts, and Roth IRAs. You can find a great comparison tool to compare all types, including state-sponsored plans available in your state, at Saving for College.


The most common type of college savings plan is the Section 529 Plan, which is a state-specific college savings program. The 529 Plan may be used for college expenses such as tuition and fees, books and other expenses, and room and board for part-time and full-time students. You don’t necessarily need to live in the state where you choose to contribute, nor does your child have to attend school in that state. For example, you could live in New Jersey, contribute to the Michigan 529 Plan, and your child could attend school in sunny Florida.

Prepaid or Contributory

Many states offer two types of 529 Plans: prepaid and contributory.

  • Prepaid plans: Contributions are used to purchase college credits at a discounted rate for the future. For example, in the Michigan Education Trust, parents may purchase college credits that will be used to attend college in the future but at today’s prices. Note that some prepaid plans, such as the Michigan Education Trust, require the beneficiary, or child, to live in the state at the time of purchase.
  • Contributory plans: Similar to a traditional savings account, contributions accumulate interest over time. The maximum contribution for each student is determined by the individual plan, but many states offer plans with a maximum contribution in excess of $300,000 per beneficiary.

Coverdell Education Savings Account

The Coverdell Education Savings Account (ESA) is similar to a contributory 529 Plan. Deposited contributions accumulate interest over time. Unlike the 529 Plan, though, the ESA can be used for elementary and secondary school expenses. Also, the ESA has a much lower contribution limit of $2,000 per year for each child.

Roth IRA

Traditionally considered a retirement investment account, Roth IRAs can also be used as a college savings tool. Parents (or working students who have already started their IRA) can withdraw funds to be used at a qualifying education institution. Typically, there are penalties and tax consequences if you withdraw funds from an IRA before retirement, but there are some expenses, such as education or a first house, that are considered penalty-free.

How much money will you need to save?

Once you determine which type (or types, since you can use more than one) of college savings fund you will use to fund your baby’s education, you can begin to think about how much you will need to save, as well as how you will begin saving. At Saving for College, you can use tools to help calculate the expected cost of your child’s education, as well as how much you should save to have that amount when your child needs it.

Start saving

Automate it

Many college savings plans offer automatic withdrawals from your checking or savings accounts. You can also set up automatic deductions from your paycheck for some savings plans. By establishing small, incremental deposits into your child’s savings plan, you’ll be more likely to remember to contribute and the account will grow exponentially with regular contributions and accumulated interest.

Make regular lump sum contributions

Throughout the year, it will also be helpful to contribute in various lump sum amounts. For example, contribute an extra amount on holidays and your child’s birthdays. Also, you can contribute a portion of your tax return or any other unexpected payment that you may receive throughout the year. Every little bit counts, and many savings plans will accept small contributions in increments as low as $15 or $25.

Get help from family and friends

Anyone can contribute to your child’s college savings plan. Remind grandparents and other family members or friends that they can help pave the way for your child’s future. Especially around the holidays, family members may want to give money instead of presents that your child doesn’t need. Other people can even open their own college savings account and list your child as the beneficiary. I recently opened a 529 account for my nephew. I’ll contribute to it for each holiday and birthday, and only give him a small present to open. Babies are only interested in crinkling the wrapping paper, anyway, and a contribution to his college savings plan will have a longer lasting benefit!

College may be a long way out for your child, and the amount that you need to save may be daunting. Even so, you should start saving now, even if you can only contribute small amounts.

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