Late Start – College Savings Options

It isn't always possible to save immediately for college while your children are very young. Use these accounts to build college savings if you are getting started late.
By Richard Barrington

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Raising children is expensive, and many people aren’t able to begin putting aside money for college while they pay for early childcare, orthodontia and retire their own student debt. If you must wait until your child is in middle school or high school before saving significantly for their college costs, certain accounts are best-suited to the task.

In the years immediately preceding college it can be wise to funnel any new savings into deposit accounts such as CDs, money market or savings accounts. At the same time, research college scholarships or grants for which your child may be eligible.

Certificates of deposit (CDs)

With only a few years left before college, it may be too risky to make any new investments in volatile instruments. With that being the case, you might find ordinary savings accounts or CDs that offer you better return than risk-free alternatives within 529 plans. The minimal tax savings you would get on a year or two of short-term interest within a 529 plan might not offset the fees within that plan.

Shifting to deposit vehicles might be especially effective if you set up a CD ladder with maturity dates timed to coincide with your college tuition payments. This approach can work in tandem with an existing 529 plan or other college savings plan, as using savings outside that plan to take care of the initial tuition payments allows the money in long-term plans to continue to benefit from tax-free earnings for as long as possible.

Money market accounts

Money market accounts are easily accessible and can offer appealing interest rates, depending upon your initial deposit and average balance. These accounts permit six or fewer withdrawal transactions per month, so use them to build savings and minimize withdrawals until college invoices arrive.

Savings accounts

Savings accounts typically offer higher interest than you may find with checking accounts, generally have low minimum deposit requirements and your cash is readily accessible when needed.

Whether you choose CDs, money market or savings accounts for later college savings, be sure to shop around because rates vary greatly among banks. lists the best CD rates to make this job easier. The downside for parents who use bank CDs and other savings accounts for college savings is that tuition inflation may outpace the interest rate on their account. If this happens, meeting college savings goals can become more difficult.

Build savings during college

Some people forget that it isn’t necessary to have four years of college costs saved up-front as your child(ren) matriculate. Many continue to save for college costs throughout the undergraduate years. Below are some avenues for savings growth while your child is a college student.

  • Part-time work
    Students’ earnings from part-time employment can cover some expenses. It can help students appreciate the value of their education when they work to earn some of it themselves. Maintaining a paid position can also help students organize their time efficiently so they are as productive as possible.
  • Social networking
    Social networking sites can help make saving for college a reality by creating online savings goals that can be publicized in order to raise funds. College savers can hold funds in an FDIC-insured bank account and earn interest as they move toward their savings goal.

    Saving for college by using social networking tools can also enhance a sense of responsibility. These students know that their educations are being funded by people they know, rather than an impersonal government entity, which can help motivate them to stick to their educational goals.

  • Student checking accounts
    One final account worth mentioning is an interest-bearing checking account to handle routine expenses while in college; there are accounts that offer special deals for students.

    In particular, look for an account with no monthly maintenance fee. According to the most recent Checking Account Fee Survey, avoiding these fees could save you $158.88 per year – an amount that would represent a sizeable chunk of a typical student’s account balance.

Beyond savings: student loans

After saving for college and qualifying for college scholarships or grants, it still may be necessary for students to borrow to cover the total cost of attendance. A student loan is financial aid given to a student by a federal or private lender that is specifically intended for education costs. These loans usually carry lower interest rates than other loans and are frequently issued by government agencies. Comparison sites allow parents and students to search for private and federal loans. Rates, terms and the total cost of a student loan can all be compared and contrasted to help find the most appropriate loan for the potential student. The debt on a student loan is assumed by the student upon graduation, unless a co-signer is involved.

Comprehensive saving for college starts early by using a long-term savings vehicle, such as a 529 plan to benefit from tax-free investment earnings. If your student is in elementary school or younger, understand all the savings tools at your disposal in our article, “Best accounts for college savings.”

In the years right before college, consider low-risk deposit accounts to give you the liquidity to make tuition payments, and choose a checking account that helps preserve the student’s precious financial resources.

Frequently Asked Questions

Q: I’m going to be starting college in the fall. Where do you suggest I look to find good savings and checking accounts for college students?

A: It makes sense to focus on the checking account first, because finding a good one can be a big challenge for college students.

Free checking accounts are becoming increasingly rare. The most recent Bank Fee Survey found that just 36.6% of checking accounts now are free of any sort of monthly maintenance fee. Since those fees come to a total of more than $140 a year on average, they can take a serious chunk out of the typical student’s account balance.

While banks will frequently waive monthly checking account fees under certain conditions, college students often don’t have the two things most often necessary to qualify for those fee waivers: a weekly paycheck to be directly deposited or a large account balance.

Still, there are ways a college student can find free checking. One good place to look is online banks. Here are some reasons why online banks are often an especially good fit for younger people:

  1. They are more often likely to offer free checking accounts. Two-thirds of online checking accounts have no monthly fees, compared to just over a third of checking accounts at traditional banks.
  2. They have smaller minimum balance requirements. Those smaller balances are often a better fit with the limited finances of most college students.
  3. When they do charge fees, those fees tend to be lower. This is true of monthly maintenance fees, overdraft fees and ATM fees.
  4. They offer geographic flexibility. This is important for students who travel frequently between home and college. Just make sure you choose an online bank with an ATM network that covers both places.
  5. Today’s college students have grown up with the Internet. This makes that generation especially comfortable doing business online.

Online banks are not necessarily the only good option for college students. Some traditional banks offer special accounts for students, with low balance requirements and no monthly fees. These special accounts are most often found at community banks, but some larger institutions offer them as well.

As for savings accounts, college students face the same challenge all savings account customers face today: Interest rates on those accounts have shrunk to practically zero. According to the FDIC, the average interest rate on savings accounts is now down to just 0.06 percent. However, you can find savings account rates more than 10 times that average if you shop around. Online banks are a good place to look, and when comparing rates, make sure you can meet the balance requirement for the rate being advertised.

About Author
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).