Does Your Child Even Need a College Fund?

If you're a new parent or an expectant parent, you've likely got a lot on your mind. From feeding and caring for your newborn to selecting a pediatrician, it can feel like there's an overwhelming amount of factors to consider. But one thing you may not be thinking of, at least not yet? Starting a college fund. After all, your babe is still in diapers! Their post-secondary education is still 18 years away, right? But according to several experts, you should begin planning for that future right about…now.

Why? Because college is expensive—very expensive. Many higher education programs cost tens of thousands of dollars; according to a 2016 article by the Wall Street Journal, the average college graduate's student loan debt is at a whopping $37,172—and that's just the average. It's like buying a new car, or taking out a mortgage on a small home.

Of course, "the amount that you decide to save [for college] is a very personal decision, one that is unique to your family's values, circumstances, and other financial priorities," Patricia Roberts—a higher education savings advocate and the author of  Route 529: A Parent's Guide to Saving for College and Career Training with 529 Plans—tells Parents. So if you are planning to contribute to that savings, the sooner you can begin, the better.

But guess what? Saving as much as you can in hopes of putting your kid(s) through college is not all it's cracked up to be—nor is it a wise idea. Ahead, the pros and cons of starting a college savings fund for your child, and how to do it right if you do.

Related: Retirement vs. College Fund: How to Balance Both

Skipping loans—and thus saving on interest—is the big one here. "Whatever amount you are able to save for your future student will be huge, as it will be that much less that needs to be borrowed—and repaid with interest," Roberts explains. Mason Miranda, a credit industry specialist, agrees, telling Parents that "one major benefit of a college fund is that it will help…avoid large student loan debt."

That said, it is important to note that college savings accounts should be earmarked as such. General savings accounts, for example, will be counted as an asset or income, and could negatively affect your child's ability to get financial aid. "A disadvantage of having a college fund is that the earnings will be subject to income taxes annually," Paul Sundin—a certified public accountant and tax strategist—explains. "These assets could reduce eligibility to financial aid," particularly need-based grants and loans. 

"Assets in the child's name—including a savings account, trust fund, or brokerage account—will count more heavily against the financial aid award than assets in a parent's name," Katie Lobosco writes for CNN. "Money saved in an account owned by the child could cost you four times as much in financial aid as money in an account owned by a parent." 

Related: How to Tell Your Kids That They're the Ones Who Will Be Paying for College

In addition to impacting your child's potential financial aid award, saving too much for your child's collegiate career in advance can also negatively impact your own financial security.

"The biggest downside of saving too much for your child's college is the impact it could have on your own financial security," Brian Walsh—a certified financial planner—tells Parents. "I've worked with many parents that were aggressively saving for their child but did not have an emergency fund or were not saving enough for their retirement. It is critical to prioritize your own finances before saving for your child. As a parent, I completely understand the desire to provide for your child no matter what, but as a financial planner, it can create major issues."

For this reason, if you are going to start a college savings fund, it's crucial to do it right.

"There are several options for getting into college and/or creating a college fund," Sundin tells Parents. "There's the Roth IRA, insurance policy, or eligible savings bonds that are not necessarily intended to be a college fund initially but can be converted for that specific purpose. Saving early for a college fund, especially starting when the children are still young, is highly beneficial because you save more to cover most of the college expenses, and a 529 savings plan is often the most tax-friendly option, since many states will allow parents to deduct the contributions from the state income tax."

However, regardless of which savings account you choose, it's imperative to investigate all options; loans, grants, and scholarships may also be necessary to fund your child's education in a way that preserves your family's financial stability.

Related: How to Use Life Insurance to Pay for Your Kids' College

"Most parents are not able to save enough ahead of time to completely pay for their child's education," Walsh tells Parents. "But there are options if they still want to help. Some parents decide to help pay tuition as it is incurred, for example, and consider it as part of their household budget. Others take out loans to help fund college." Others prioritize guiding their kids through the process of paying for college themselves.

Employment reimbursement programs are also an option. "If you work for an employer that has an educational assistance program, you may be able to cover some or all of your expenses," Roberts explains. "Many students work full time and pursue their education part-time to save money."

Beginning your collegiate career at a local school or community college can also be a huge savings because, as Roberts explains, "this approach will lower your overall expenses while eventually leading to the same goal." Just make sure any and all credits acquired can be transferred.  

Whatever approach you take, Walsh advises, it's "extremely important to make sure your financial plan is not derailed by increased expenses or debt." That means for your kids and for you, too, Mom.