Between tuition, food, books, and housing, many students graduate with tens of thousands of dollars in debt before they even enter the job market. Some colleges are offering more scholarship aid than ever to help lessen this financial burden on students and their families—including merit-based scholarships that reward academic achievement and encourage students’ pursuit of excellence, but there are plenty of things you can do to budget and save for college expenses.
There are several methods of saving money for your child’s or children’s college education. You can start early, make it a priority, and contribute regularly over the years, or you can wait until later in life (if there is enough time) and set aside a lump sum of cash all at once. The earlier you start, the easier it will be because compound interest can work wonders if given enough time. There are many ways to invest money toward college savings: high yield savings accounts, 529 plans, certificates of deposits, stocks, and bonds… The list goes on. There are tax advantages for some methods that allow you to shoulder less out-of-pocket expense while saving.
Section 529 Plans
One way to help pay for college is to take advantage of the tax benefits offered by Section 529 plans, also known as qualified tuition programs.
Here are seven key facts about Section 529 plans:
1) Section 529 plans allow parents and other family members or friends to contribute money used to pay for a child’s qualified education expenses at institutions of higher learning such as colleges and universities as well as some vocational schools. They can be established for one or more children, grandchildren, nieces, nephews, and other individuals
2) Although contributions are not deductible for federal income tax purposes, the donor gets a state income-tax deduction for all or part of the contribution
3) A child may receive contributions from more than one person – including an individual, another trust, or estate
4) There is no federal tax on the earnings in a Section 529 plan, provided that they are used for qualified educational expenses (see below)
5) Fifteen states and the District of Columbia permit deductions for state income tax purposes with annual contribution limits ranging from $100 to $300,000
6) As with other college savings plans, the account owner controls the Section 529 plan assets and who will benefit from them
7) If distributions are not used for qualified educational expenses, income tax plus a 10% penalty on earnings can apply
Savings bonds (U.S. Treasury Securities)
U.S. Savings Bonds are an attractive option because they offer both a competitive interest rate and tax deferral; depending on your income you may not pay any federal taxes on the interest earned. Savings Bonds may be purchased for as little as $25 and can be redeemed (bought back) at any time after a year.
Certificates of deposit (CDs)
A certificate of deposit is a promissory note issued by a bank or thrift that usually requires the depositor to keep the funds on deposit for a set period of time in exchange for an interest rate higher than available from conventional savings accounts. In most cases, there is a penalty imposed for early withdrawal of principal before the CD’s maturity date. CDs are insured up to a maximum amount per account holder with some banks but always check first with your own financial institution just to make sure you have full coverage. It is not recommended that you use CDs as a long-term investment unless you are sure that you will not need the money for the entire term of the CD.
U.S. Savings Bonds (Series EE and I bonds)
Series EE savings bonds come in denominations from $50 to $10,000, though there is currently a limit of $10,000 per series in paper form, so it’s best to purchase these electronically if you have more than this amount to put toward college savings. They are sold at face value; e.g., a $100 bond costs $100 – no commission or fees are charged by the federal government when they are purchased directly from an issuing agent like USAGov. Interest earned on U.S. Treasury bonds is free of all state and local taxes, qualifying the U.S. Savings Bond as a tax-free investment. There is an annual limit on how much interest you can accrue on EE Bonds, currently set at $10,000 per person per year (inflation adjusted).
Stocks or mutual funds
Although I wouldn’t recommend using these to save for college in particular because their value tends to fluctuate far too often to yield consistent results over time, diversified stock portfolios may play an important role in your child’s long-term financial plan if he or she decides to go to graduate school or work later in life before paying off loans taken out for undergraduate study. You should only use stocks that are low risk but have the potential for growth.
To learn more about our 529 plans and how to save for college, visit us at the USAGov’s College Savings Plans Network .
Start early, since money invested today can grow substantially over the course of 18 years or more. Remember that it’s never too late to get started.