College Saving Tips

Most people will tell you to start early and that is true, but it is never too late to start. Many States offer plans to families that want to save for tertiary education and there are a number of government initiatives and tax breaks available to assist with savings’ goals.

The 529 Plan is the most common and utilized plan available for college saving. The 529 Plan is now offered by all 50 States and the District of Columbia. This plan enables parents and grandparents to invest large sums (often $300,000 or more per beneficiary) tax free for education. There are two options for 529 saving.

Prepaid

Prepaid plans are often administered by States or tertiary education facilities. These plans enable parents to lock in future tuition fees at current rates. These are tax deferral plans which are designed to remove investment risk. The pitfall of this type of savings is that many of these plans stipulate that funds are tuition only and not for room and board. This may mean a requirement to families to save additionally.

Savings

These plans may be administered by individual States while the actual account is usually allocated to a separate financial services companies. The State will administer the plan but the interest and funding aspects are handled elsewhere.

Qualifying Uses

With both the Prepaid and the Savings 529 Plans, money can be used for tuition fees as well as other approved education related expenses. Approved expenses include, tuition, books, supplies and equipment required for any program offered by an accredited school. These funds can also be used for room and board as long as the fund beneficiary is at least a half-time student. Qualified education expenses do not include student loans and student loan interest.

529 Plan Caution

A caution of 529 Plans is to bear in mind that withdrawals for anything other than education will incur a 10% penalty and the 529 account is counted as an asset which may impact on a recipient’s eligibility for student loans and grants. If a student, or the parent of a student, owns the 529 account, then the financial aid office will only consider 5.64% of it when calculating the expected family contribution. Plans can be owned by people other than the student or the student’s parents and that may be an option for families wanting to save, but not able to have the 529 counted toward income.

Other Providers

An abundance of education savings plans exist for those who wish to take advantage of the high pooled interest rates and tax advantages.

U.S. Savings Bonds purchased after 1989 may be redeemed tax-free when the bond owner, spouse or dependent uses the proceeds to pay college tuition and fees. However, the bond’s safety is balanced by low returns, and the tax exclusion is phased out for higher-income tax brackets.

Until recently the Coverdell Education savings plan was also an attractive alternative to the 529 Plan, for families wanting to save for education, but in 2010 the benefits of this plan have been largely eroded and most would agree that the 529 is more appealing.

Tax Benefits

In some cases taxes on profits of education saving fund accounts are deferred and savings are exempt from federal taxes. The money grows tax deferred and is tax free when withdrawn to pay qualified education expenses, and may be deductible on your state tax returns. In addition, for families with multiple children, funds can be moved from one 529 to another, depending on which child can best use the money.

Some estimates for the money required for an education by 2020 are as high as $225,000 to put one child through a private college, or $105,000 for a public university.

Those sorts of figures suggest it would be a very good idea to put some money aside.