Saving for College using ESA or 529
How much you save for college is important, but how you save it will impact financial aid in the future. There are many different ways to save for college. Over these next few weeks, we will look at some of the ways to save for college, which can help. Previously we looked at savings accounts and Savings Bonds. ( https://www.jenniferwake.com/post/two-ways-to-save-for-college )
The third way you could save is to open a Coverdell Education Savings Account (ESA). ESA are funds that can be used for higher education or private education K-12. The yearly cap for contributions is $ 2,000 per child. This means that if grandparents, aunts, and uncles give gifts towards education, only $2,000 total each year can be put into an ESA for each child. This is not very much, but it can add up to possibly a semester or two in college if invested aggressively.
The money in ESAs can be used for tuition, fees, books, supplies, equipment, and special needs equipment. If the student is attending at least half-time, it can be used for room and board. Contributions are allowed until age 18; all money must be spent by age 30. ESAs have limitations, but using them to pay for private high school or supplies for college makes them a good “vehicle” to save with.
A fourth option is to open either a 529 college savings account or a 529 prepaid tuition account. These are state-run plans. Each state and the District of Columbia have their own plan or plans. Some states use other states’ plans to help cut back on administrative costs.
These plans come in two styles.
The first is a prepaid tuition plan. You pay for an in-state public college tuition at today’s rates. This type of plan is used to force you to choose the college your child will attend. If you are a diehard University of Alabama alumni, your child may acquire your love of the “Crimson Tide,” or they may not. If your child chooses not to attend your college, most of the time, you can move it into the college savings plan.
The 529 college savings plan allows you to invest money into mutual funds. The earnings grow tax-deferred and are tax-free if used for qualified education expenses. When you withdraw money from the 529, it should be sent directly to the school. The school uses that money to pay for qualified expenses, which include tuition, fees, books, supplies, equipment, and special needs services. It can be used to pay for room and board for students who attend at least half-time. These plans can be transferred to another person (i.e., if your first child gets a full scholarship, you can transfer their 529 to a sibling or a cousin). You do not have to be a resident of a state to choose their 529 plan.
Don’t forget about the website saveandinvest.org and its wonderful chart summarizing your choices. On their website is a good pamphlet called “Smart Savings for College—Buy Better Degrees,” which you can download. If you decide to go with a 529 plan, you can go to savingforcollege.com and find tools to compare plans between states.