If you’re counting on scholarships and grants in addition to your savings to pay for college, find out if the gift aid you affects the amount of financial aid you’ll be awarded
While college financial aid is available to help students with financial need pay for a college education, you may not be awarded enough to cover the cost of your top choice for college or university. To help cover costs, you can apply for scholarships and grants, but again, you don’t know how much money for college you’ll be awarded.
The rising cost of tuition makes it even more important to start saving early to pay for college. The more money you’re able to save will give you more flexibility in choosing the school you attend. Fortunately, there are a variety of savings plans set up to help you pay for your college degree.
Are your parents willing and able to help you save for college? Parents or other legal guardians, can play a key part in helping to set up, and fund, some of these accounts.
There are four main ways to save up your college money:
- 529 College Savings Plans
- Coverdell Education Savings Account (ESA)
- Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA)
- Savings bonds
529 College Savings Plans
These investment plans can be used for college expenses, such as tuition. They are set up and funded on behalf of a college student by parents, grandparents or other people who want to contribute, and the college money is exempt from federal income tax,
There are two types of 529 plans: In the prepaid tuition plan, you pay for college tuition credits now at today’s costs, in the hopes of saving money, since college costs like tuition tend to increase. The college savings plan allows you to invest your money and enjoy tax benefits from your investment. However, in this plan, there’s no guarantee your college money will increase. You could lose money, just as you would with an investment in the stock market.
Both plans are administered by states, although prepaid plans can also be administered by colleges and universities. Each state may have its own fees and terms, so be sure you read the fine print before choosing this plan. You can learn more about your state’s 529 plans on the College Savings Plans Network website.
Coverdell Education Savings Accounts (ESA)
The Coverdell ESAs are investment accounts that can be used to fund a student’s education in college. Unlike 529s, which are limited to money for college or university, the ESAs can also be used for elementary or secondary school. Like the 529s, however, this money can be used to fund qualified expenses such as tuition.
Either a student or a parent or guardian can own an ESA. Distributions of this college money are tax free, as long as they don’t go over the qualified education expenses. Also, if the money is not used by the college student by age 30 or gifted to another student under age 30, there may be taxes and other penalties.
Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA)
Parents aren’t allowed to transfer assets directly to kids who are still minors in most states, so they can instead give gift money to a trust. Custodial accounts like the UGMA and UTMA are the most common types of trusts.
These custodial accounts are established through banks or other financial institutions, like brokerage firms and mutual fund companies, and can be funded with cash, mutual funds and stocks. UTMA accounts can also be funded with real estate. The minor must be under 14 years of age to qualify for this type of account, and the student then receives the money when they reach the age of maturity, which differs by state.
Unlike the 529s and ESAs, these funds do not need to be spent on education; the student can choose to spend them on anything. However, the money amassed in these accounts are factored into a students eligibility for college financial aid and could limit the amount of money the student is awarded.
Savings bonds are a low-risk way to save money for college. These bonds are tax-exempt when used to cover the costs of a college education. Key benefits of this option are that you don’t need to open an account at a bank or other financial institution; bonds can be purchased in small denominations; and the interest is tax-exempt when used for college costs.
College Savings Plans Tips & Tactics
- If a parent is the owner of your Coverdell account, the amount of money in that account is not factored in to your college money when you apply for federal aid. In other words, you are eligible for receiving more federal aid if you don’t own these accounts, since a college student is expected to contribute more of their assets to college than their parents are.
- Don’t think you’ll use all of your college money? You can transfer the money in a 529 or ESA to another family member without having to pay taxes or other penalties on it.
- If you’re counting on scholarships and grants in addition to your savings to pay for college, find out if the gift aid you affects the amount of financial aid you’ll be awarded. Some scholarships and grants are factored as part of your assets while some are not.