College 101
Investment Options: How to grow your money for college
If you've ever seen a movie, you might be under the impression that being a broke college student is cool. Or at least entertaining.
It's not.
While we're at it, the guys on your floor won't look like Channing Tatum.
To avoid being an actual starving student, you might want to consider investments. Investments let you take any cash you have now (from cat-sitting Aunt Elma's vicious cat) and making it grow. By investing, you're accepting risk—sometimes a lot and sometimes a little—and (hopefully) getting cash for it. Yep, it's more free money.
Good news: investments work best when you start early.
You can check out our section on investing for all the deets, but here are the most common options as you prepare for college.
IRAs and Roth IRAs
These puppies are tax-protected retirement accounts.
- Traditional IRAs let you enjoy tax benefits now: if your family earns $50,000 this year and puts $5,000 into your IRA, they'd only have to pay taxes on $45,000 ($50,000 – $5,000). They pay the remaining taxes when they take the money out.
- Roth IRAs don't provide that tax advantage; you pay taxes on it now. However, when you take the money out, you don't have to pay any extra taxes.
The money in these accounts grows more quickly than it would in a savings account because IRAs are made up of stocks, bonds, and mutual funds, which are all (at different levels) riskier than leaving your cash in the regular ol' bank.
Usually, there's a big penalty to take money out of an IRA before retirement, but if your parents are using the cash to pay for college, they're exempt from those fees. Of course, it does mean that your parents will have less money when they retire…and they might be counting on you to help when the time comes. And hey, why wouldn't you?
Life Insurance
If your parents have whole or universal life insurance, they're paying monthly premiums for it. Part of that money goes toward the life insurance (so if they pass away, you still have cash to pay for basic stuff). The other part goes toward investments, which is what your parents can use to help pay for your college education.
Be warned: universal or whole life insurance policies cost a lot, and the insurance company gets a big chunk of it, so you're left with less cash. It's not ideal, but it's an option.
Real Estate
Let's say you and your parents have saved up a nice chunk of money for college. Well done.
You can take some of that money and use it as a down payment on a house. Live in one room and rent the rest to other college students. You'll be getting cash every month to pay down the home loan—and hopefully cover your college costs, too. Plus, you're saving money on room costs or rent, too. When you graduate, you can continue renting the house or you can sell it. If it's gone up in price, you'll have a nice little nest egg.
529 Savings Plans and ESAs
These savings plans are investments created especially for people who want to save up for college, and they offer tax savings. There are no age restrictions on 529 savings plans, so even if your parents didn't set one up for you, you can still get started.
Education Savings Accounts (ESAs) are similar: before you go to college, you put money away in the account. When you have to go to college, you can take out the money without paying taxes on it the way you might with other investments.