Federal Deposit
Insurance Corporation

Fall 2012 - Tips for Parents and Caregivers

Audio (MP3 3.22mb)

Providing Financial Aid: Saving for a Child's Future

Many young people look forward to getting their own car but overlook what they may need to do to comfortably afford it, especially if they'll be borrowing money. Here are strategies to consider well before you go to the dealership.

• Start planning and saving for college expenses as early as possible. How early? “Preferably before your child can even talk,” said Luke W. Reynolds, Acting Associate Director of the FDIC’s Division of Depositor and Consumer Protection.

A good option is to arrange to automatically transfer money from your bank account or paycheck into a college savings fund. Online calculators can help you estimate how much you might need to save for college.

There are many ways to save for education. The following may have tax benefits depending on your income and other factors, but consult a tax advisor for guidance: “Section 529” college savings plans consisting of both pre-paid tuition programs (to lock in today’s prices at designated universities) and traditional savings or investment accounts; U. S. Savings Bonds; traditional and Roth Individual Retirement Accounts (IRAs); Coverdell Education Savings Accounts (also known as Education IRAs); and accounts created under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA).

• Save and invest for purposes other than education. Choices may include buying bank certificates of deposit, which are insured by the FDIC, and various products that are not FDIC-insured against loss, such as stock and bond mutual funds.
• If you must take out a loan for the benefit of a child, be careful. For example, before you (or your child) take out a loan for education purposes — including borrowing from a retirement plan — make full use of all free student aid (scholarships or grants). Doing so will make it easier to repay the loan, lower the amount of interest paid, and avoid the stress of having a large student loan debt that can limit choices and opportunities in life.

Also think carefully before co-signing a loan with a child. “Remember, you are responsible for paying the debt if your co-signer doesn’t pay,” noted Bobbie Gray, an FDIC Supervisory Community Affairs Specialist.

• Have adequate life and disability insurance. These can avoid financial ruin for your family and provide an extra cushion of support for higher education payments if something bad were to happen to you.