Strategies for college savings
Prepare for your child's college expenses
It’s no secret – the cost of college is on the rise. Every year, technical schools, state schools and private universities nudge up the amount it costs to send a child to school. In fact, college costs have increased 3.2 percent per year beyond the inflation rate over the past decade, according to the College Board.
It’s never too late – or too soon – to prepare for your child’s college education.
Save as much as you can
Everyone has a unique financial circumstance, but the important thing is to save as much as you can for as long as you can. Start with an amount you can afford, and add to it as you can.
When you’re ready to start saving, it’s important to find the college savings tool that best meets your needs and goals. Consider looking for tax-advantaged strategies that can help your money grow - and go further.
Section 529 plans
Section 529 plans* are one of the most popular tax-advantaged college savings options. These plans (which include college savings plans and prepaid tuition plans) help families set aside and invest money for future college costs. Your savings grow tax-deferred and earnings are tax-free, as long as you use the money for qualified college expenses. Some states give additional tax breaks to residents making Section 529 contributions. Section 529 plans have no income restrictions and have high lifetime contribution limits.
Life insurance is another common college savings tool. If the primary wage earner passes away, the proceeds can be used to pay a portion of college costs. Loans against the cash value of the policy are tax-free. In addition, life insurance policies are not considered when calculating federal financial aid.
Coverdell Education Savings Accounts (formerly known as education IRAs) allow you to contribute up to $2,000 per year, per child, into an education fund. Like Section 529 plans, your savings grow tax-deferred and earnings are tax-free if the money goes toward qualified college expenses. Geared toward the middle class, Coverdell accounts do have income limits. However, anyone (parents, grandparents, etc.) can open an account.
Through the Education Savings Bonds Program, interest earned on certain U.S. savings bonds may be tax-exempt if bond proceeds are redeemed for qualified educational expenses. The interest earned is guaranteed. Certain rules and restrictions apply, including income limitations. It is also important to note that the bonds must held in the minor child’s name in order to qualify for the tax exemption.
Don’t rely too heavily on financial aid
Financial aid is often an important part of paying for a child’s college education, but you should try to avoid relying too heavily on it. Loans (not scholarships and grants) make up the largest percentage of financial aid packages today (approximately 50 percent). At least two-thirds of college graduates today leave school with a median loan debt around $20,000, according to the College Board. Additionally, most financial aid packages are based on need. If you focus on saving money for college expenses today, you and your child may be less dependent on college loans and financial aid packages in the future.