Education/College funds

Saving for College

College is no longer optional for those that want a shot at a successful career. According to recent statistics, only one out of four parents has saved for their child’s college education by the time their child is ready to graduate high school. Financial aid and loans provide people with some assistance when the time comes to pay for college, but not everyone qualifies for financial aid and loans can create problems for students and their parents down the line. Scholarships are another option for those wanting to curb the cost of college, but again, they shouldn’t be counted on. If parents have some time before their child will be entering college, there a lot of options that can make saving for college easy.

Custodial Account:

A custodial account is simply a savings account in a child’s name that is controlled by their parent. Once the child reaches legal adulthood, they have control over the account, which means that “saving for college” could turn into “saving so little jimmy can dork around without a job” depending on his individual ambitions. Custodial accounts are easy to set up and easy to contribute to. They are, however, taxed annually based on how much the account earns and they are also taxed when the money is withdrawn. Parents also can’t switch beneficiaries on the account and the money in the account is considered the child’s asset which can hurt their chances of being approved for financial aid.

Coverdell Education Savings Account (ESA):

A Coverdell Education Savings Account places some restrictions on how much can be contributed (no more than $2,000 per year for those that are married making less than $190,000/year). ESA’s have been used much like health savings accounts because the money can be withdrawn at any time to cover elementary or secondary school expenses including private school tuition or after school care as well as post secondary education expenses. People that open ESA’s have a wide range of investment choices and total control over how the money is invested. However, at the end of 2010, provisions will be changed to exclude withdrawals for elementary or secondary education. The money in HAS’s must be used before the beneficiary turns 30, at which point the money will be distributed to the beneficiary at a 10% tax rate.

529 College Savings Plan:

The 529 College Savings Plan is the most popular way for parents to save for college. Money in these accounts accumulates tax-free and can be withdrawn tax-free as long as it is used for approved educational expenses which include: tuition, room, board, books, and computers. There are no income restrictions on these plans, but there is a lifetime maximum contribution limit of between $235,000 and $300,000 depending on the state where the account is opened. The money saved with a 529 savings plan can be used at any accredited college or university in the country. The parents also stay in control of the account so they can choose what to do with any excess money. The only drawback to this kind of account is that the investment options are defined by the state where the account is opened. There are also penalties for withdrawing money early or using the money for anything other than higher education.

529 Prepaid Tuition Plan:

The 529 Prepaid Tuition Plan is a great option for parents whose children will be attending public schools in the same state where they live. The 529 tuition plan allows parents to pay tuition at current rates for school in the future, so people who choose this plan don’t have to worry about the stock market at all. This plan places lower contribution maximum limits on the account, and there is a time limit placed on the funds: usually 10 years after the child graduates high school. The money saved in these accounts can be withdrawn tax-free as long as it is used for tuition only. Excess money saved can be rolled into other accounts to cover tuition for other relatives.