Child care worker with little kids.

Moving from child care costs to saving for college

When the kids no longer need child care services, consider dedicating that money to college funding.

Is your child one of the millions of children in child care? If so, child care expenses are likely a significant line item in your budget. Reliable child care can be difficult to afford. According to recent research, the cost to send a child to daycare averages $340 per week and if a nanny is hired, that cost averages $612 each week.

Saving for college may seem impossible while paying for child care along with other fixed expenses, such as housing, utilities and food. However, there is light at the end of the tunnel. When your child begins elementary school and no longer requires full-time child care, you may see a significant increase in your discretionary income each month.

Saving for college

Before you convert those child care dollars into disposable income, consider investing in your child's college education. After all, you may already be accustomed to living without that income. We have a college savings calculator that can be utilized to help determine how much to save for your child’s college education. Keep in mind, the average cost for both tuition and books can vary greatly depending on the school selected.

Investing for college

There are different investment options available that offer tax advantages while you accumulate funds to help pay for future education expenses.

Coverdell Education Savings account (ESA)

One option is the Coverdell Education Savings Account (ESA). The ESA is a trust or custodial account with a $2,000 annual contribution limit that can be used for your child's elementary and secondary education, as well as post-secondary education, such as college, graduate school or vocational school. You can invest in a Coverdell ESA account regularly, if your income is under a certain amount, with current year contributions accepted until that year's tax-filing deadline.

529 college savings plan

If you'd like to invest more toward your child's education, consider a 529 savings plan for qualified higher education expenses. Depending on the 529 plan you choose, it could be used in primary or secondary school as well. Even if you don't contribute the maximum amount allowed by your state, it's a good idea to save smaller amounts every month or every paycheck.

A quality education may be one of the most important factors in determining your child's future. It's never too early to begin saving, and dedicating funds you previously used for child care may be a great way to start.

Neither State Farm nor its agents provide tax or legal advice.

Before investing in a 529 plan, consider the plans investment objectives, risks, charges, and expenses. Contact the plan issuer for an official statement containing this and other information. Read it carefully.

Investors should consider before investing whether their or their beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.

Investments Are Not FDIC Insured* | No Bank, State or Federal Guarantee | May Lose Value

*Except the Bank Savings Investment Option

Automatic investment plans do not assure a profit or protect against loss.

If assets are not used for qualified expenses at an eligible educational institution, the earnings portion of the withdrawal is subject to federal income tax, an additional 10% federal tax and may be subject to state and local taxes.

Qualified higher education expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance, and certain room and board expenses incurred by students who are enrolled at least half time at an eligible educational institution. This includes the purchase of computer or peripheral equipment, computer software, or internet access and related services, if used primarily by the beneficiary during any of the years the beneficiary is enrolled. Also included are certain expenses for special-needs services needed by a special needs beneficiary, apprenticeship program expenses, and payment of principal or interest on any qualified education loan of the Beneficiary or a sibling of the Beneficiary (up to an aggregate lifetime limit of $10,000 per individual). Qualified elementary and secondary education expenses include no more than $10,000 of tuition, incurred by a designated beneficiary, in connection with enrollment or attendance at an eligible elementary or secondary school. As state laws vary, consult your tax professional about your particular situation regarding the state tax treatment of withdrawals for K-12 expenses.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.


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