The Best College Savings Plans for Babies

You know what they say — it’s never too early to start saving for college

When it comes to your newborn, that’s very true. The average student loan debt taken out by students is just over $37,000(1). And that continues to go up if you consider graduate schools. 

baby with toys

💡 The Frank Takeaways:

  • Starting a savings plan for your baby means less chance of student loans later
  • Education Savings Plans are government-funded and easy to manage but limit your yearly contribution
  • 529 Savings Plans are handled by each state and have high contribution limits but limited investment options
  • Coverdell ESA’s are like training wheels for parents hesitant to make the wrong savings choice

You know what they say — it’s never too early to start saving for college. 

Did you File FAFSA® Yet

When it comes to your newborn, that’s very true. The average student loan debt taken out by students is just over $37,000(1). And that continues to go up if you consider graduate schools. 

But it can be challenging to decide which savings plan works for you and your family. We take a look at some of the most popular so you can make an informed decision when the time comes.

Starting a Savings Plan for Your Baby

The right first step to starting a savings plan is determining how much you want to save. Again — this is a personal choice and depends highly on your expenses and wiggle room for savings. 

Once that’s figured out, here are a few plans to consider. 

Education Savings Account (ESA)

Education savings accounts (ESAs) are state government-funded savings accounts that aim to help you finance your child’s education. The money in an education savings account can fund various educational expenses throughout their college education.

It allows you to save $2,000 after taxes per year per child and watch it grow year over year. Of course, growth will depend on your investment choices, but you can expect to see a significant increase.

Plus, you don’t have to pay taxes on the amount you save as long as you only withdraw for qualified education expenses.

Pros: 

  • You get your choice of investment options
  • It’s tax-free to withdraw for qualified expenses
  • Watch your savings grow year-over-year

Cons:

  • Families are limited to $2k per year, per child
  • Income limits for saving
  • Must be used by the time your child is 30

529 Savings Plan

A 529 plan is a savings plan that helps parents save for the child’s education with some tax exemptions. It’s named after Section 529 of the Internal Revenue Code, which created the savings plans in 1996, and offers tax-advantaged investments to cover the cost of education. 

States and educational institutions operate these plans, and they’re designed to help families put aside money for future college expenses.

These plans vary by state, and luckily, you can open one up in any state you choose. Whether you live there or not. It’s best to look into states that make sense for you and determine which plan is best.

Pros: 

  • No income restrictions for saving
  • Higher contribution limits depending on which state you open it in
  • Can open one in any state you choose

Cons:

  • Hefty fees for withdrawing early or for anything other than education expenses
  • Limited investment opportunities depending on where you open it
  • If your child gets a scholarship or decides not to go to school, there’s a 10% access fee for withdrawing money

Coverdell Education Savings Account (ESA)

The Coverdell ESA functions similarly to your regular ESA, and it’s just a bit easier to manage for parents that need more guidance. 

These accounts are limited to $2,000 in contributions a year, and you can only contribute until your child is 18 years old.  However, you do have a wide variety of investment opportunities like with your typical ESA. 

And another bonus? This money can be used for any education expense throughout your child’s life, including primary and secondary schooling. 

Pros:

  • Easier to manage for parents that need some extra help
  • More investment opportunities which means more growth

Cons:

  • It’s harder to change the beneficiary if you need to
  • Your child must use it by age 30, or you no longer have access

As you can see, there are many choices when it comes to saving plans for your baby. Talk to a financial advisor to determine what the best option is for you. After all, saving early means less chance you or your child will need student loans later.