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If you haven't yet started your family or if your children are still very young, you should consider how best to save money to fund your children's college education. Beyond financial aid and scholarships, there are ways to start saving now so that you have the money available when your children graduate from high school.
 | Accumulating assets in your name has very little negative impact on your child's ability to qualify for federal financial aid. However, should you decide to accumulate money in your child's name, approximately 35 percent of those assets will be deemed available to pay for college costs, and financial aid will be reduced accordingly. So keep most or all the money you save for your child's college education in your own name if you expect your scholar to qualify for financial aid. |
Education Savings Accounts
If you're within the income limits, you can contribute up to $2,000 per year to a Coverdell Education Savings Account (ESA) for each child under the age of 18. Anyone with income of less than $95,000 ($190,000 if married filing jointly) may contribute. Contributions aren't tax-deductible; however, the earnings grow tax-free and remain tax-free as long as they're used to pay for qualified education expenses.
You can open an ESA with a bank, mutual fund company, or any other financial institution that offers traditional IRA accounts. Look first to low-cost, no-load (no commission) mutual fund companies.
Education Savings Accounts are considered assets of the parent when determining financial aid eligibility. However, there are a lot of benefits, such as tax-free earnings, that far outweigh the negative impact on financial aid qualification.
529 plans
Section 529 qualified tuition savings plans have evolved into one of the most attractive college savings programs available today. Just like ESAs, 529 plan assets accumulate tax-free, and if your child uses them for qualified education expenses, the withdrawals are tax-free, too. You can invest $100,000 or more in a 529 plan, and you have no limitation based on your income.
The 529 plans are state-sponsored programs. If your state offers good 529 plans, you may be able to deduct all or a portion of your contributions on your state income tax return. Savingforcollege.com offers information and resources about all 529 plans; pay particular attention to the plans offered through your state.
When determining eligibility for financial aid, 529 plans are considered assets of the parent.
Series EE and I Savings Bonds
You can purchase up to $30,000 (face amount) of either Series EE or Series I Savings Bonds per year. They're issued by the U.S. government, but you can buy them through local banks or through Treasury Direct for as little as $25. Savings bonds may appeal to you if you're looking for a very low-risk investment.
You receive no tax deduction for this investment; however, the interest on savings bonds is tax-free if the bonds are redeemed to pay for qualified education expenses and your income doesn't exceed the federal limitations in the year of redemption.
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