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Resources > Investing for Children > Child Education Investment Plan—Best Investment Options & Additional Tips

Child Education Investment Plan—Best Investment Options & Additional Tips

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Investing in your child’s college education early on is the safest way to ensure you’ll be able to cover their tuition and fees once they leave for college. Tuition rates rise every year—in fact, if we compare the 2022–23 and 2023–24 academic years, there’s been a 5% increase in tuition costs at private U.S. universities, a 4% increase at in-state institutions, and a 1.4% increase at out-of-state colleges.

It’s difficult to predict how much tuition will cost by the time your child goes to college, but you can start investing while they’re still young to secure some or most of the funding. In this guide, we’ll help you create a child education investment plan by introducing you to the best investment options and providing tips on choosing a college investment account for your child.

How To Select the Best College Investment Account for Your Child

Choosing the best college investment plan for your child’s higher education depends on factors like the type of college they’ll attend, its costs, and your budget. To ensure you make the right choice, you should:

  1. Set a financial goal
  2. Stay informed about education costs
  3. Consider your child’s age

Set a Financial Goal

Before you start exploring investment options for college, take some time to determine your financial goals for your child’s college fund. Consider the following aspects:

  • Are you investing in your child’s undergraduate or post-graduate program?
  • Do you expect your child to attend an in-state or an out-of-state school?
  • Which state and federal income tax regulations apply to the current education programs?

Answering these questions will help you determine how much money you’ll need to save and choose the right investment option accordingly.

Stay Informed About Education Costs

Creating your child’s education investment plan will be easier if you stay informed about college costs over the entire course of investing in your child’s education. This way, you’ll be able to adjust your investments according to the changing cost trends. 

Recent data shows that the average cost of college fees and tuition per academic year is:

  • $10,662 at a public in-state college
  • $42,162 at a private college
  • $23,630 at an out-of-state public college

Taking these prices into consideration can help you determine how much to invest and where, at least for the time being.

Consider Your Child’s Age

You can determine how much time you’ll need to reach your savings goal depending on your child’s age. This allows you to plan your investments accordingly. 

For example, if your child is three years old, you’ll have around 15 years to grow your investments since most children start their higher education at the age of 18. In this case, long-term education savings accounts can be a good investment option. However, if your child is ten years old, you may look into short-term investment options like certificates of deposit (CDs) or money market accounts.

The Best Child College Investment Fund

There are various ways you can invest money for your child’s college, from traditional college savings accounts to less conventional investments like funds and bonds. Conventional investing accounts are typically designed specifically to help you save money for education costs, and the three most popular options include:

  1. 529 plans
  2. Coverdell ESA
  3. UGMA/UTMA accounts

529 Plans

529 plans are tax-advantaged education savings accounts that help you pay for your child’s primary, secondary, or college education. To invest in these plans, you typically open an account on your child’s behalf and name them as the beneficiary. This allows your child to use the collected funds for higher education once they leave for college.

There are two types of 529 plans:

  1. Education savings plan—This plan allows you to contribute money and invest it in a preset selection of investment options like mutual funds and exchange-traded funds (ETFs), meaning that your account value grows depending on the investment’s performance
  2. Prepaid tuition plan—This plan lets you prepay tuition at current rates for a child who won’t attend college for another few years, which means you’ll likely pay a lower cost of college attendance

The money you invest in this account grows tax-deferred, and the withdrawals you make are exempt from state or federal tax as long as the money is used for education-related expenses. Additionally, 529 plans have no restrictions regarding your income or contributions.

Coverdell ESA

Coverdell Education Savings Accounts (ESAs) are custodial investment accounts that let you save money for your child’s education. These accounts require a parent or a guardian to set up an account and choose their child as the beneficiary. When your child turns 18, they take control of the account and must spend the collected funds by the age of 30. If the money is used to cover education expenses, there’s no tax on contributions or deductions.

Unlike 529 plans, Coverdell ESA includes the following contribution limits:

  • You can’t contribute more than $2,000 per child annually
  • To contribute to the account, your modified adjusted gross income must be lower than $110,000 a year or $220,000 if you’re married and have a joint account
  • If your income ranges from $95,000 to $110,000 or $190,000 to $220,000 for married couples with a joint account, these accounts offer a reduced contribution amount limit

UGMA/UTMA Accounts

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts let you invest in your child’s education by acting as an account custodian and making contributions until your child becomes an adult. After that, they gain control over the account and can use the funds for anything that benefits them—they’re not limited to using the money for college only.

These accounts also allow you to invite other family members to contribute, and they let you invest the money you saved in stocks, bonds, and funds to help you grow the account balance over time.

While there aren’t any penalties for withdrawals from UGMA/UTMA accounts if you use the funds for your child’s benefit, the return you earn is taxed at the child’s rate since they’re the account owner.

How To Invest for Your Child’s Education—Top Investment Options

Besides investing money in education savings accounts, you can also rely on various investment instruments to collect funds for your child’s education. If you opt for a 529 education savings plan, you can also use these instruments to grow your account balance.

Still, investing can be risky, especially when you invest in stocks, which can result in significant money losses due to the rapid change in stock value. This may not be the best option if you’re a parent looking to save as much money as you can before your child goes to college. Luckily, there are also lower-risk investment options that can bring decent returns. These include:

  1. U.S. savings bonds
  2. Mutual funds
  3. Exchange-traded funds

U.S. Savings Bonds

By buying a U.S. savings bond, you lend money to the U.S. government so you can later get it back with interest. Because they’re government-backed, savings bonds are one of the safest investment options. 

You can digitally buy savings bonds from TreasuryDirect.gov and use them for your child’s education. There are two types of bonds you can buy:

  1. EE bonds—These are low-risk investments that earn interest regularly for 30 years or until you cash them. They typically double in value in 20 years
  2. I bonds—These include an interest rate that changes every six months based on inflation

The interest you earn on your savings bonds usually counts as gross income for tax purposes. However, you can avoid taxes on the interest in case you use the money to pay for college—if you meet conditions like:

  • Being 24 or older when the bond is issued
  • Having a modified adjusted gross income that’s lower than the cut-off amount set by the IRS for the year in which you want to take the tax exclusion
  • Cashing the qualifying savings bonds in the tax year in which you want to take the tax exclusion

Mutual Funds

A mutual fund is a pooled investment, meaning that you and other investors buy stocks, bonds, and other assets together. If your investing knowledge is limited, mutual funds may be a good option since they’re run by a money manager who decides which investment instruments you should buy and sell. However, having a professional actively involved in decision-making means you’ll have to pay higher fees.

Exchange-Traded Funds

Like mutual funds, exchange-traded funds (ETFs) include an investment portfolio of diverse investment instruments, like bonds and stocks. While ETFs are traded in stock market exchanges at regular hours, mutual fund trades occur once a day after the market closes. ETFs also track a specific market index and include commission-free options, meaning that you can complete certain trades without fees.

However, ETFs and mutual funds are counted on the Free Application for Federal Student Aid (FAFSA) as taxable income. This means your child may receive less financial aid if you decide to file the FAFSA for additional help to pay for college.

Other Ways of Investing for Kids’ College

While traditional college savings accounts and investment options like bonds and mutual funds are the most popular options when investing for kids’ college, you can also save a substantial amount of money if you:

  1. Explore brokerage accounts
  2. Open a retirement account
  3. Subscribe to a credit building service

Explore Brokerage Accounts

A brokerage account allows you to invest and collect money in one place until you’re ready to gift it to your child. These accounts are opened at a licensed brokerage firm that handles your investments.

They don’t impose any contribution limits, so you can invest as much money as you want in stocks, bonds, mutual funds, or ETFs and withdraw the funds whenever you want. However, the earnings you make when you sell your investments are subject to tax.

Open a Retirement Account

While the main purpose of accounts like Roth IRAs is to help you collect money for retirement, you can also use them to save money for your child’s education. When you invest in a Roth IRA, your money grows tax-deferred, and you can withdraw both your contributions and the returns you earned tax-free after you reach the age of 59½.

Early withdrawals from Roth IRAs include a penalty on your earnings equal to 10% of the withdrawn amount, but the withdrawn funds are penalty and tax-free if you use them for college-related expenses like tuition, fees, and books.

Subscribe to a Credit Building Service

Collecting enough money to cover the cost of college tuition and expenses at a four-year institution can be challenging, even if you start investing in your child’s education early in their life. This is why many parents and students apply for college loans to help cover the remaining college expenses.

While there are usually no credit checks when your child applies for federal financial aid, some types of college loans, such as private and Direct PLUS loans, require you and your child to have a good credit history to get approved for aid. If you want to enable your child access to a wider range of college financing options, consider helping them build a strong credit score as soon as possible.

Starting their credit building journey early can help your child potentially save over $200,000 in their lifetime since they’ll have better chances of securing loans with favorable terms and interest rates. This way, it’s easier for them to:

A great way to assist your child in getting started with credit building early is to rely on a platform like FreeKick. This service lets children establish a good credit profile through parent-sponsored credit building, starting as early as the age of 13.

FreeKick—Premium Credit Building and ID Protection

FreeKick is an FDIC-insured deposit account and subscription service provided by Austin Capital Bank that offers parent-sponsored credit building services to young adults and minors aged 13 to 25. The platform also provides identity monitoring and protection services for the whole family of up to two adult parents and six children.

Start Building Credit Early With FreeKick

If your child wants to obtain a credit card as a minor or young adult, they won’t be able to do so since the CARD Act of 2009 prohibits anyone under 21 from getting a credit card, making it difficult for children to build credit early. Although you can add your child to your credit card to help them build credit, their entire credit history will be lost once you remove them from your card.

FreeKick goes around this limitation by allowing children as young as 13 to establish a strong credit score with their parents’ help. Here’s how to activate the credit building service: 

  1. Create an Account—Visit FreeKick.bank and choose a plan that best fits your family’s needs and budget
  2. Set It and Forget It—Once the account is activated, FreeKick will automatically start building your child’s credit over the next 12-month period
  3. Keep Growing—When the first 12 months pass, you can either renew the account and keep building your child’s credit or close it and get a refund of your initial deposit

Keep Your Identity Protected With FreeKick

Once you start your child’s education investment plan, you must keep it safe from identity criminals since statistics show that one in three Americans reported experiencing some form of ID theft

If you decide to open a college savings account in your child’s name, you must also ensure their identity is protected since alarming data shows that a child’s identity is stolen every 30 seconds

To protect your and your child’s accounts, FreeKick offers comprehensive identity monitoring and protection features for both adults and minors. Here’s what the service includes:

Services for Adult Children and ParentsServices for Minor Children
Credit profile monitoring
SSN monitoring
Dark web monitoring for personal information
Up to $1 million identity theft insurance
Full-service white-glove concierge credit restoration
Lost wallet protection
Court records monitoring
Change of address monitoring
Non-credit (Payday) loan monitoring
Free FICO® Score monthly
FICO® Score factors
Experian credit report monthly
Credit profile monitoring
SSN monitoring
Dark web monitoring for children’s personal information
Up to $1 million identity theft insurance
Full-service white-glove concierge credit restoration
Sex offender monitoring—based on sponsor parent’s address

FreeKick Pricing

Regardless of your family’s needs, FreeKick has a plan that will fit your budget. Both available plans are FDIC-insured up to $250,000. Find more details in the table below:

FDIC-Insured Deposit AmountPlan Fee
$3,000$0 (Free)
No deposit$149/year

Assist your child in securing college financing options through early credit building and protect your whole family from identity theft—sign up for FreeKick today.

Freekick provides a double dose of financial empowerment and security for your whole family. It helps teens and young adults build strong credit profiles and offers identity motoring for up to two adult parents and six children under 25.

Freekick: ID Protection & Credit Building

Protect Your Family’s Identities
Safeguard up to 2 parents & 6 children
Build Your Child’s Credit
Build credit for your children ages 13-25. Good credit can save them $200,000 over their life!
Pay $0 A Year
Make a one-time deposit of $2,500 or pay $149/year with no deposit
Powered by Austin Capital Bank
FreeKick is a combination of a FDIC-insured deposit account, credit building, & identity monitoring services

Get 10% off on the first 3 monthly payments

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