The Best Way to Save for Your Child's Education, According to Dave Ramsey

Here's how your child can go to college without incurring debt.

As a parent, you want to give your child the best possible education. But paying for it can be daunting. Since 2000, the cost of tuition has increased by 178% and the cost of college textbooks is up 162%. The cost of education for a public four-year in-state institution is over $100,000, and those attending private nonprofit universities will pay close to $220,000 over four years.

To help pay these costs, financial guru and best-selling author Dave Ramsey has some great tips on how to save for your child's education. Let's take a look at his advice so you can start saving today!

Baby steps

Before you do anything, Dave Ramsey recommends starting with an emergency fund, paying off your debt, and saving for retirement before saving for college tuition. When it comes to an emergency fund, he suggests having three to six months of living expenses saved up in case of job loss or medical emergencies. This is important because it will ensure that you don't have to dip into the funds you are saving for your child's education if something unexpected comes up.

Ramsey also says to pay off all debts using the debt snowball method. Begin by jotting down all your outstanding debts, leaving out your mortgage. Arrange them from the smallest to the largest balance, without considering the interest rates. Then, focus on making minimum payments for everything, except the smallest debt -- that's the one to pay off first. Once it's wiped out, switch that payment to the second smallest debt while maintaining minimum payments for the rest. The next step is to invest 15% of your household income for retirement in a 401(k) or IRA account.

Educational Savings Account (ESA) or Coverdell

Once you've successfully tackled these steps, Ramsey advises either setting up a 529 plan, an educational savings account, or a trust (UTMA/UGMA). A Coverdell ESA is similar to a Roth IRA in that the money grows tax-free and qualified distributions are tax-free. You can contribute up to $2,000 (after tax) per year, per child. Money in an ESA can be used for college, K-12, vocational schools, and items such as textbooks and school supplies.

The benefit is that you have a wide range of investment options and your money grows tax-free. But, your contributions are limited to $2,000 per year, you must be within the income limit to qualify, and the funds must be used by the beneficiary by age 30.

529 plans

A 529 plan is a tax-free savings account that is specifically designed for educational expenses. The money in this account grows tax free, and when it's used for school tuition and other approved expenses, withdrawals are also tax free. Some 529 plans allow you to transfer the funds to other family members.

The benefits of a 529 plan are that the cap on contributions is higher (varies by state but can be up to $300,000), the money grows tax-free, and typically there are no income limits or age restrictions. But the funds must be used for educational purposes and if you contribute more than $17,000 in 2023, you will be subject to the gift tax.

UTMA or UGMA

UTMA and UGMA stand for the Uniform Transfer to Minors Act and the Uniform Gift to Minors Act. These acts were established by U.S. law as a way of providing minors with a legally secure option for saving money or being gifted assets. When a parent establishes an UTMA or UGMA account, they are creating a legal trust that allows them to contribute money on behalf of their children prior to them becoming adults.

This can help kids build some financial stability during their formative years and allow them to access the funds when they turn 18 or 21 years old. It also allows parents to shift any responsibility for large gift taxes onto themselves once their child reaches adulthood. The benefits are that the funds can be used for anything and there are tax advantages for the contributor. However, the beneficiary has full control of the funds and can do what they wish with it, gains may be taxed every year, and the beneficiary can't be changed after being selected.

Saving for your child's education doesn't have to be scary or overwhelming! Following Dave Ramsey's guidelines will help ensure that you are making smart decisions with your money and your budget, while still providing the best possible educational opportunities for your kid(s). Ramsey says to first start with his recommended baby steps, then look into setting up a 529, Coverdell, or trust. With these tips in mind, you'll be well on your way to giving your kids the brightest future possible!