The Basics of College Savings Accounts
Student bank accounts make it easier for students to save and manage their money. But if you're unsure of how and where to start saving, don't worry. Student Finance Domain has outlined the basics for you, including four short-term savings options that you should know about.
Before you open up a college savings account, you need to pick a bank or other financial institution. The Student Finance Domain student banking section has many tips to help you select the right bank. Once you select your bank, assess what your savings needs are. Because everyone's financial situation is unique, the same college savings account won't work for everyone. No matter what you ultimately choose, there are a variety of features that can help you bank most easily and inexpensively:
- Low or no minimum balance requirement
- Free ATM card
- Free ATM usage (at ATMs that belong to that financial institution)
- Seamless access to student checking accounts
- Free online access to your account
The simplest college savings account is a basic savings account. These types of accounts usually require a low minimum balance, if any, and have few fees. They allow you access to your money at any time and can be linked to other online banking accounts or student checking accounts. The biggest downfall to these basic plans is that they produce very little interest. So if you carry a small balance and drain your account regularly, this type of student bank account might work for you.
Another type of short-term savings account is a money market account. These accounts typically deliver higher interest rates than basic college savings accounts, but usually carry monthly maintenance fees. Unless you keep a significant balance in a money market account, the monthly fees may actually be more than the interest you earn. Additionally many money market accounts require a higher minimum balance than other savings accounts.
A third type of short-term savings account is a certificate of deposit or CD. These accounts require that you leave your money in the bank for a pre-determined period of time, ranging anywhere from a month to several years. In exchange for 'lending' your money to the bank, you receive a promissory note that indicates the rate of interest you will earn on your deposit. If you have the luxury of time, a CD may be a good option for you to earn a little extra interest money in a relatively short period of time. Note that if you need to withdraw your money before the pre-determined period for that CD, you will be required to pay penalties.
The last type of short-term savings account most appropriate for students is the money market fund, which can be opened through a mutual fund company or other financial institution. In addition to yielding higher interest rates than typical savings accounts, money market funds allow students the opportunity to get their feet wet with the world of investing and the stock market, with little risk.
If you have a little time before you matriculate, you and your family can also consider a section 529 college savings plan to help save for your education. These 529 college savings plans are administered by individual states plans and enable parents and others to save for a student's education in one of two ways. Money can be deposited into a fund, typically a mutual fund, and it will be grow or decline in accordance with the fund's stock market performance. A second type allows parents to purchase tomorrow's college tuition credits at today's rates. Both options deliver the benefit of tax savings because the money deposited into 529 college savings accounts grows state and federal income tax free.
Opening a college savings account is an important step to take for your financial future. But if your college savings falls short of what you'll need to pay for college, you should know your financial aid and private or alternative student loan options.