Smart Strategies to Pay for College

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BIG Ideas:

  • 529 savings plans offer many benefits for college savings, including tax-deferred growth, tax-free withdrawals, and higher contribution limits.
  • Coverdell Education Savings Accounts can also help you save for college, provided you meet the income requirement.
  • Other options that can help with saving for college include Uniform Gift to Minors Act (custodial accounts and Roth IRAs. 

The learning journey of college can be one of the best investments you can make in your child’s future. But to make the investment in education possible, you’ll need to do some learning of your own, especially when it comes to paying for it.

With the average cost of college nearing $40,000 per year per student in the United States, many families today face a big financial challenge: how to afford it.

Sure, you can apply for financial aid, but what if you still need additional funds to meet the cost of college? Private student loans can help you make up the difference, but that still means you’ll have debt you need to pay back.

One way to help reduce the amount you and your child will have to borrow is by saving for college. Before we dive in, just remember that everyone’s situation is different, so it’s always smart to check with a certified tax professional before making any decisions. With that in mind, here are some smart savings vehicles that can help you set aside money for college:

529 Plans

Named after Section 529 of the Internal Revenue Code (IRC), 529 plans are state-sponsored, tax-advantaged savings plans that allow you (the donor) to save for college on behalf of your student (the beneficiary).

There are two types of 529 plans: college savings plans and prepaid tuition plans. Both offer tax-deferred growth and tax-free withdrawals if you use them for qualified education expenses (tuition, fees, room and board, and related costs).

Another benefit of college savings plans is that they offer generous contribution limits that vary by state, allowing you to save more.

With prepaid tuition plans, you can lock in tuition at current rates, even when your student may be years away from college. But unlike college savings plans that let you withdraw funds to pay for room and board, prepaid tuition plans only allow you to lock in the cost of tuition.

Coverdell Education Savings Accounts (ESAs)

Another option for saving for college is a Coverdell Education Savings Account, a type of custodial account or trust that lets you save up to $2,000 per year, per child, for college costs.

Like 529 plans, your funds in a Coverdell ESA can grow tax-free, and you can make tax-free withdrawals for qualified education expenses when your child reaches college. However, Coverdell ESAs differ from 529 college savings plans in that you have more investment options beyond just mutual funds, including stocks and bonds. One drawback is that there is an income limit cap to contribute to a Coverdell ESA. Please check with a tax professional on what these limits might be.

Other Custodial Accounts

Though not specifically for college expenses, Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts are custodial accounts that allow you to set aside money on behalf of a minor. There are some distinctions for these custodial accounts between states, including which states may recognize custodial accounts set up in another state. So be sure to check your state’s rules since availability and regulations can vary.

They don’t offer the tax benefits of 529 or Coverdell ESAs, but the funds you accumulate don’t have to be used for college. That makes them an ideal way to save for your child’s future, even if you’re unsure if they will attend college.

Roth IRAs

When you think of a Roth IRA, you may think of retirement. But you can use those funds to pay for your child’s college. Your after-tax contributions to your Roth grow tax-free, and you won’t be taxed on funds you withdraw to pay for qualified college expenses. However, keep in mind that contributions you can make to a Roth IRA are limited

More tips for saving for college

Now that you know about these savings vehicles, let’s look at some tips to help you with saving money for college:

  • Make saving a habit by making regular contributions to your college savings.
  • Automate your savings to make it easier to build funds.
  • Have your child apply for scholarships and grants to bring down the cost of college.
  • Apply for financial aid using the FAFSA.

Brazos is Here to Help Make College Affordable

For more than 40 years, Brazos has helped make college costs more affordable for parents and students. As a Texas non-profit lender, we offer competitive rates that can help you save. Contact us to learn more.