College is an investment for a lifetime. A college education opens doors for a graduate that otherwise might never have such opportunities. But in today’s economic climate, saving for your children’s future can be daunting. In just the past decade, the average cost to attend public universities has risen over 50%. The average cost just for tuition at a state college is now over $5000 and out of state students can expect to pay between $4000 and $18000 more. If learning is what you seek, then knowledge about how to save for college is what you need now.
A 529 plan is a popular investment strategy to help you save for future higher education expenses, whether for college or an accredited professional school. There are two basic kinds, a savings plan and a prepaid tuition plan based on freezing current tuition costs. The funds from a 529 plan can be used for most education related costs, such as: tuition, fees, books, supplies and room and board.
Contributions to 529s have been designed for maximum flexibility in order to make them attractive to any income level. Monthly contributions start at as little as $15.00 via automatic transfer or payroll deduction. Some states offer matching grants and other incentives to further reward savings. Withdrawals for qualified expenses remain free from federal and most state taxes. Rollovers for other family members is an easy process.
The Coverdell Education Savings Account
Once known as Education IRAs, Coverdell ESAs are set up similarly to Roth IRAs and are used for any qualified school expenses including private K-12 institutions (up until 2011). A parent or other party can make non-deductible contributions up to a maximum of $2000 per year to the IRA and if not totally used by one child are easy to roll over to another family member. However, yearly contributions are limited and can be tricky to coordinate with other plans such as the Hope Tax Credit. Withdrawals are limited to equal or less than college fees, but there can be stiff penalties for going over the limit.
While not focused specifically for college, the Uniform Transfers to Minors and the Uniform Gift to Minors might be options for some families to save for their child. Essentially, an UTMA or UGMA account is opened for a minor child and a parent or other responsible party is placed as custodian until the child reaches the age of majority which varies by state from 18 to 21. There is no limit to the amount of money that can be placed in either of these accounts and the tax situation varies according to state. Once the age of majority is reached however, the child has full control over the account and can use it for anything that strikes their fancy. So, this may not be appropriate for some students.
Savings bonds can also ease the college cost burden, but have quite a few restrictions. Savings bonds bought in the student’s name do not qualify, and benefits phase out according to the taxpayers Modified Adjusted Gross Income (MAGI). For those bond holders who qualify, the interest used to pay tuition may be tax free.
Hope Tax Credit
While not an actual savings plan, the Hope Tax Credit can soften the blow of tuition and fees. Usable for the first two years of college the Hope gives a $1,500 dollar for dollar reduction in income. Costs such as room and board or books do not qualify and scholarships and grants also reduce the amount of qualified expenses.
Lifetime Learning Credit
The Lifetime Learning Credit allows up to a $2,000 tax credit for students attending any type of post secondary institution, even job skill enhancement. It can be claimed for an unlimited number of years and applies to both full and part time students. Room and board is not an eligible expense, however, books, student fees and tuition are allowed. Non-credit, sport and hobby classes are not allowed. Only one credit can be taken per year regardless of the number of students attending school and has income level phase out similar to the savings bonds.
Deciding which plan or mix of investment plans best serve your needs to defray the costs of college is a certainly complicated. You may wish to enlist a certified financial planner to help you devise a plan based on your income, how long you have to save and other resources. Saving something is better than saving nothing and starting early builds a softer cushion for when you write that first check to the registrar and say, “Whew, good thing we made a plan!”
Sources: www.collegesavings.org; www.irs.gov/publications/p970; www.savingforcollege.com; www.collegesavings.about.com