School’s out. We are getting ready for a vacation, summer camps, and hopefully some fun. We are also worried about paying for college. I recently read an article stating that college graduates collectively owe over a trillion dollars in outstanding student loans. The article emphasized how these loans are giant anchors around a graduate’s neck. Paying back student debt is preventing graduates from buying cars, homes and furniture. One graduate was quoted as saying "These loans are stunting my growth as a citizen. No car. No home." If at all possible, I want to be able to help my kids through college so they won’t be overburdened with debt when they graduate. What is the best way to save for college?
I’ve answered this question before, but sometimes repetition helps ignite action. First of all, no matter how you do it, the sooner you start the better. College is expensive and costs are rising every year. Here are four common ways to save for college.
“Uniform Gift to Minors Act” and “Uniform Transfer to Minors Act” accounts are less popular than they were before 529 Plans and Coverdell accounts became available. UGMA or UTMA accounts are taxable. Children under age 19 (24 if full-time student with earned income that pays less than half of their support) pay tax at their parent’s tax rate on dividends, interest, and capital gains that exceed $1,900. Since the child is the owner of the account, after she turns 18 (or 21 if set up that way) she can spend the money on whatever she wants (not every young adult is financially responsible). Another disadvantage is that the value of the account could adversely affect her when applying for financial aid.
529 College Savings Plan
This is the best by far because Congress specifically created this plan with some great incentives to help you save. Earnings grow tax-free and withdrawals for qualified higher education expenses are tax-free. The owner of the account, usually the parent or grandparent, maintains control of the assets and can change the beneficiary to another family member any time.
Coverdell Education Savings Account
Like 529 Plans, earnings and qualified withdrawals are tax-free. However, unlike 529 Plans, these accounts can be used for any grade level from kindergarten through college. The weak spot of the Coverdell plan is an annual limit of $2,000 on contributions. There are also maximum income limits on who can contribute to a Coverdell account. However, since even a child can contribute, if you earn more than the limit you can gift $2,000 to the child and then in turn he or she can contribute on his or her own behalf. Consider a Coverdell if you want to send your child to a private high school. Put $2,000 in the Coverdell each January and then put as much as you can during the remainder of the year in the 529 Plan for college. If you don’t use the money for high school it will be there for college.
Parents’ Investment Accounts
You can save for your child’s college in your own investment accounts, but you forfeit any tax advantage. However, you keep control of the funds and can use them for whatever you want.