Saving for College With Your Bank Is a Terrible Idea — Here’s What to Do Instead

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

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If you’re a parent, it might be hard to think about the future between cereal spills and crayon masterpieces on the wall.

But the cost of college is rising. By 2030, it’s projected to cost more than $205,000 for four years at a public college.

So, how do you prepare for your child’s future now? One of the best ways is with a 529 plan.

What is a 529 plan?

A 529 plan is an investment vehicle that allows you to save for your child’s education. There are two types: a college savings plan and a prepaid tuition plan. This article will focus on the former, which is more popular. But if you’re curious, you can check out the differences between 529 plans.

With the 529 college savings plan, you contribute money throughout your child’s life into an investment account. Then, when your child is ready to attend college, they can use the money for tuition, books, room and board, and other related expenses (even a computer).

The difference between a savings account and a 529 plan is the latter is invested into the stock market — which means it has the potential to earn more returns than a savings account.

Let’s say you contributed $100 per month for 18 years. Using our simple savings calculator, here’s what you’d end up with:

  • In a savings account at 1.00% interest (which you’d get only with a high-yield savings account), you’d have $23,655 by the time your child went to college.
  • In a 529 savings plan that earned average returns of 7 percent, you could have nearly double that amount: $43,072.

And don’t worry: It’s not like you’ll be picking and choosing stocks yourself. Each state’s 529 plan is managed by financial advisors. Most plans will start out riskier (more stocks and fewer bonds) and become more conservative (fewer stocks and more bonds) as your child nears college age.

Of course, you always expose yourself to risk when you invest in the market. If the ups and downs make you nervous, check out these alternatives to 529 plans.

The pros and cons of 529 plans

Consider these pros and cons when deciding if a 529 plan is right for you.

Pros

Cons

  • Minimum deposits: Some states require you to open a 529 plan with at least $1,000 or fund the account with a minimum amount per month.
  • Limited to education expenses only: If your child doesn’t attend college, your 529 plan’s earnings will be subject to taxes and a 10 percent penalty. One way to use the leftover 529 plan (and avoid the fees) is by passing it on to a sibling.

How to sign up for a 529 plan

Here are the steps you should follow when you’re ready to sign up for a 529 plan.

1. Choose your 529 plan

Since each state has its own 529 plan, most people sign up for the 529 plan where they live.

Although you’re welcome to cross state lines when you sign up for a 529 plan, most states won’t give you a tax credit if you use an out-of-state plan. That said, if you’re in a state that doesn’t levy an individual income tax or offer tax benefits for 529s, then you should shop around for the plan with the lowest fees and highest returns.

To compare plans, try this tool from SavingForCollege.com. It offers in-depth information about each state’s plan and allows you compare plans side by side.

what is a 529

Image credit: SavingForCollege.com

You also can open a 529 plan through a financial advisor — and not the state — but doing so usually means higher fees.

2. Open and fund the 529 plan

Once you choose the 529 plan that’s right for you, all that’s left to do is open it. You usually can do so online, and it’s helpful to have personal information — like Social Security numbers and birthdays — on hand.

You’ll also need to fund the 529 plan with a transfer from your checking account. Many states have no minimum contribution amount, but others require a transfer of at least $250.

One thing to note is you shouldn’t be saving for your child’s education over your retirement.

Although it might seem selfish, it makes financial sense. There are many ways to fund a college education (loans, scholarships, etc.), but no one can fund your retirement except you. So, only create a 529 plan if you’re already making good headway with your retirement fund.

3. Set up automatic contributions

Now is also a good time to set up regular contributions to your 529 account — even $25 per month adds up over the years. To see how much you should contribute, use this college cost calculator.

what is a 529 plan

Image credit: SavingForCollege.com

Going forward, you could ask family members to donate to your child’s 529 plan in lieu of gifts. Although it might take some getting used to, your child will be grateful by the time college rolls around.

Education is one of the best gifts there is. And if you’d like to help bestow it upon your child, a 529 plan might be the way to go.

Need a student loan?

Here are our top student loan lenders of 2020!
LenderVariable APREligibility 
1.24% – 11.98%1Undergraduate, Graduate, and Parents

Visit College Ave

1.25% – 9.44%*,2Undergraduate and Graduate

Visit SallieMae

1.24% – 12.49%3Undergraduate and Graduate

Visit Discover

1.24% – 11.44%4Undergraduate, Graduate, and Parents

Visit Earnest

1.90% – 11.66%5Undergraduate and Graduate

Visit SoFi

2.72% – 13.00%6Undergraduate and Graduate

Visit Ascent

3.52% – 9.50%7Undergraduate and Graduate

Visit CommonBond

* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.

1 Important Disclosures for College Ave.

CollegeAve Disclosures

College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

  1. Rates shown are for the College Ave Undergraduate Loan product and include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
     
  2. This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. This informational repayment example uses typical loan terms for a first year graduate student borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7.10% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $141.66 while in the repayment period, for a total amount of payments of $16,699.21. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 7/1/2020. Variable interest rates may increase after consummation. Lowest advertised rates require selection of full principal and interest payments with the shortest available loan term.


2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

3 Important Disclosures for Discover.

Discover Disclosures

  1. Aggregate loan limits apply.
  2. Students who get at least a 3.0 GPA (or equivalent) qualify for a one-time cash reward on each new Discover undergraduate and graduate student loan. Reward redemption period is limited. Please visit DiscoverStudentLoans.com/Reward for any applicable reward terms and conditions.
  3. Lowest APRs shown are available for the most creditworthy applicants and include an interest-only repayment discount and Auto Debit Reward. The interest rate ranges represent the lowest and highest interest rates offered on Discover student loans, including undergraduate and graduate loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable margin percentage. For variable interest rate loans, the 3-Month LIBOR is 0.375% as of July 1, 2020. Discover Student Loans may adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Our lowest APR is only available to customers with the best credit and other factors. Your APR will be determined after you apply. It will be based on your credit history, which repayment option you choose and other factors, including your cosigner’s credit history (if applicable). Learn more about Discover Student Loans interest rates.
  4. Lowest APRs shown for Discover Student Loans are available for the most creditworthy applicants for the Discover Private Consolidation Loan and include an Auto Debit Reward. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable margin percentage. For variable interest rate loans, the 3-Month LIBOR is 0.375% as of July 1, 2020. Discover Student Loans may adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Our lowest APR is only available to customers with the best credit and other factors. Your APR will be determined after you apply. It will be based on your credit history, which repayment option you choose and other factors, including your cosigner’s credit history (if applicable). Learn more about Discover Student Loans interest rates.
Lowest APRs shown for Discover Student Loans are available for the most creditworthy applicants for undergraduate loans, and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.

4 Important Disclosures for Earnest.

Earnest Disclosures

  1. Rates include 0.25% Auto Pay Discount
     
  2. Explanation of Rates “With Autopay” (APD)
    Rates shown include 0.25% APR discount when client agrees to make monthly principal and interest payments by automatic electronic payment. Use of autopay is not required to receive an Earnest loan.

    Available Terms
    For Cosigned loans – 5, 7, 10, 12, 15 years. 
    Primary Only – 10, 12, 15 years

    In school deferred payment is not available in AL, AZ, CA, FL, MA, MD, MI, ND, NY, PA, and WA).


5 Important Disclosures for SoFi.

sofiDisclosures

UNDERGRADUATE LOANS: Fixed rates from 4.23% to 11.76% annual percentage rate (“APR”) (with autopay), variable rates from 1.90% to 11.66% APR (with autopay). GRADUATE LOANS: Fixed rates from 4.13% to 11.83% APR (with autopay), variable rates from 1.80% to 11.73% APR (with autopay). MBA AND LAW SCHOOL LOANS: Fixed rates from 4.11% to 11.81% APR (with autopay), variable rates from 1.78% to 11.72% APR (with autopay). PARENT LOANS: Fixed rates from 4.23% to 11.26% APR (with autopay), variable rates from 1.90% to 11.16% APR (with autopay). For variable rate loans, the variable interest rate is derived from the one-month LIBOR rate plus a margin and your APR may increase after origination if the LIBOR increases. Changes in the one-month LIBOR rate may cause your monthly payment to increase or decrease. Interest rates for variable rate loans are capped at 13.95%, unless required to be lower to comply with applicable law. Lowest rates are reserved for the most creditworthy borrowers. If approved for a loan, the interest rate offered will depend on your creditworthiness, the repayment option you select, the term and amount of the loan and other factors, and will be within the ranges of rates listed above. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Information current as of 07/10/2020. Enrolling in autopay is not required to receive a loan from SoFi. SoFi Lending Corp., licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. NMLS #1121636 (www.nmlsconsumeraccess.org).


6 Important Disclosures for Ascent.

Ascent Disclosures

Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.

  1. Competitive variable rates calculated monthly at the time of loan approval based on a margin plus the 1-Month London Interbank Offered Rate (LIBOR) rounded to the nearest 1/100th of a percent. The current LIBOR is 0.176%, which may adjust monthly. Your interest rate may increase or decrease, based on LIBOR monthly changes. Rates are effective as of 08/01/2020 and reflect an Automatic Payment Discount. Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. (See Automatic Payment Discount Terms & Conditions.)
    1. Undergraduate Loans: Variable rate loans have an Annual Percentage (APR) range between 2.72% – 13.00%. Fixed rate loans have an APR range between 3.53% and 14.50% based on your credit worthiness and your selected program. Rates reflect an Automatic Payment Discount of 0.25% (for Credit-Based Loans) on the lowest offered rate and a 2.00% (for Undergraduate Future Income-Based Loans ) discount on the highest offered rate. (See Undergraduate Loan repayment examples.)
    2. Graduate Loans: Variable rate loans have an APR range between 5.33% and 11.42%. Fixed rate loans have an APR range between 6.14% and 11.92% based on your credit worthiness and your selected program. Rates reflect an Automatic Payment Discount of 0.25%. (See Graduate Loan repayment examples.)
  2. Payments may be deferred. Subject to lender discretion, forbearance and/or deferment options may be available for borrowers who are encountering financial distress.
  3. Making interest only or partial interest payments while in school will not reduce the principal balance of the loan. There are three (3) flexible in-school repayment options that include fully deferred, interest only and $25 minimum repayment. (See Undergraduate Loan repayment examples.)
  4. Flexible repayment plans may be offered up to a fifteen (15) year repayment term for a variable rate loan and ten (10) year repayment term for a fixed rate loan. Students must be enrolled at least half-time at an eligible school. Minimum loan amount is $2,000.
  5. Interest rate reduction of either 0.25% (for Credit-Based Loans) or 2.00% (for Undergraduate Future Income-Based Loans) applies only when the borrower and/or cosigner sign up for automatic payments and the payment amount is successfully deducted from the designated bank account each month. The amount of the discount is dependent upon the loan product and credit history of the borrower at the time of application. Interest rate reduction(s) will not apply during periods when no payment is due, including periods of in-school, deferment, grace or forbearance, unless a regular payment amount has been arranged with the servicer. If you have two (2) consecutive returned payments for Nonsufficient Funds, we may cancel your automatic debit enrollment and you will lose the interest rate reduction. You will then need to re-qualify and re-enroll in automatic debit payments to receive the interest rate reduction.(See Automatic Payment Discount Terms & Conditions.)
  6. All applicants (individual and cosigner) are required to complete a brief online financial literacy course as part of the application process to be eligible for funding.
  7. Eligibility, loan amount and other loan terms are dependent on several factors, which may include: loan product, other financial aid, creditworthiness, school, program, graduation date, major, cost of attendance and other factors. Aggregate loan limits may apply. The cost of attendance is determined and certified by the educational institution.
  8. The legal age for entering into contracts is eighteen (18) years of age in every state except Alabama where it is nineteen (19) years old, Nebraska where it is nineteen (19) years old (only for wards of the state), and Mississippi and Puerto Rico where it is twenty-one (21) years old.
  9. 1% Cash Back Graduation Reward subject to terms and conditions. Click here for details. In order to be eligible for the 1% Cash Back Graduation Reward, borrower must meet the following criteria after graduation:
    • The student borrower has graduated from the degree program that the loan was used to fund.
    • The student borrower may change majors and/or transfer to a different school, but must obtain the same level of degree (e.g. – undergraduate or graduate)
    • The graduation date is more than 90 days and less than five (5) years after the date of the loan’s first disbursement.
    • Any loan that the student has borrowed under the Ascent loan is not more than 30-days delinquent or in a default status as of the graduation date and until any Graduation Reward is paid.
  10. Students can apply to release their cosigner and continue with the loan in only their name after making the first 24 consecutive regularly scheduled full principal and interest payments on-time and meeting the other eligibility criteria to qualify for the loan without a cosigner.

* Application times vary depending on the applicant’s ability to supply the necessary information for submission.


7 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).

  1.  Rates are as of July 1, 2019 and include auto-pay discount. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment. Variable rates may increase after consummation.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.