Following are several types of accounts people use to save for their children’s college, and what to know about each.
Open a savings account
Many parents prefer to save for their child’s education with some kind of transaction account, such as a savings account or CD. According to Sallie Mae, college-saving parents have nearly $6,500 parked in these accounts, more than in a 529 plan, which represents 36 percent of all saved.
You need to be careful with these safe products.
“There is an asset protection allowance, or APA, that protects a portion of the parents’ assets, based on the age of the older parent,” when determining financial aid, says Mark Kantrowitz, publisher and vice president of research at SavingForCollege.com and an expert in student loans and financial aid.
Students’ income and savings, though, have a bigger, more negative, impact on the availability of financial aid than parental assets and income.
What are the disadvantages?
Because financial aid is determined based on income and assets from the year prior to applying for aid — in most cases, the student’s junior year in high school — students with sizable savings in their name could end up with a less generous package.
But even if the savings are in your name, you’re still losing out. The top 5-year CDs on Bankrate offer a yield of just over 3 percent, while the S&P 500 has delivered a total return of 13.4 percent over the past five years, according to Morningstar.
While you certainly take on more risk investing your money than simply putting it under your mattress, you may have little choice if you want to reach your savings goal.