Planning for College
College is the last educational expense you’ll have to pay for your child, but it’s the first one you should think about. Although few families can save enough to fully pay a college bill, it makes sense to save as much as possible given your family’s financial position in order to minimize college borrowing in the future. Saving a dollar today is better than borrowing one tomorrow.®
Start Today, No Matter the Age of Your Child.
Families with younger children sometimes fall into the trap of thinking saving for college can be delayed because they have many years to catch-up. Unfortunately, the lost time cannot be regained. A family that saves $1,000 on a child’s first birthday and adds $100 per month until the child turns 18 will save approximately $31,200 assuming a 4% interest rate and daily compounding. If they start on the child’s fifth birthday, the nest egg will be approximately $22,150 and only about $12,700 if they wait until the 10th Birthday.
Pick a Savings Plan that Works for You.
Some college savings plans, including 529 Savings Plans and Coverdell Education Savings Account, benefit from substantial tax advantages. On the federal level, the investments grow tax-free over their lives and can be withdrawn without paying taxes as long as they are used for school-related expenses. Many states also sweeten the pot with tax breaks.
Saving for college is a family affair. Encourage relatives and friends to include college savings in their gift baskets for birthdays and holidays. Some credit cards also direct cashback rewards to college savings. Most 529 plans have on-line gifting programs and accept deposits from gift cards that may be purchased at retail stores.
College Savings Plans
529 Savings Programs and Coverdell Education Savings Accounts have become very popular because each offers tax-advantaged opportunities to save for college. Earnings on the accounts accumulate tax-free and distributions made for college expenses are also tax-free. The primary differences between 529 Accounts and Coverdell ESAs is that Coverdell has income restrictions (your Adjusted Gross Income needs to be less than $110,000 for single filers, $220,000 for joint filers), a maximum annual contribution of $2,000 per beneficiary, and a requirement to use savings before the beneficiary reaches age 30.
529 College Savings Accounts
529’s offer the tremendous benefit of tax-free growth and the ability to withdraw the savings without paying tax as long as they are used for Qualified Education Expenses, which are broadly defined to include most expenses related to college. In addition to federal tax advantages, many states offer state tax benefits as well.
No Income Limitations
There are no income limitations associated with the 529 plan. Plans do have total aggregate caps on the amount that may be contributed, but these limitations are only for contributions, not for the total account value.
It’s Easy to Switch Beneficiaries
Some parents are concerned that their child may not attend college or there may be money left over. If that’s the case, the account owner may redesignate a beneficiary, including naming themselves. In the worst case, withdrawals for non-qualified expenses incur a 10% penalty and require taxes to be paid on the earnings.
Among the Best Savings Options when Considering Financial Aid
Families concerned that their savings may affect their eligibility for need-based financial aid should consider 529s. Ultimately, the way cash is saved is what’s most important. On the FAFSA (Free Application for Federal Student Aid) money saved in a 529 plan owned by the parent is weighed against financial aid eligibility at a maximum of 5.64%. For example, $10,000 saved in a 529 could end up reducing financial aid eligibility by $564. This is much better than having money in a standard savings account in the student’s name, where it can be weighed against financial aid eligibility up to 20%, which could be as much as $2,000 of reduced financial aid. The 529 provides a superior vehicle for college savings given financial aid regulations for higher education.
Great for Estate Planning
Grandparents find 529s to be a viable means of helping fund college for their grandkids while retaining control of their assets as part of their estate. Money put into a 529 is removed from the taxable estate, but grandparents are able to retain rights of control over the 529 accounts even when funding is typically used to cover future college expenses for their grandchildren. With a 529 Plan, you are able to make a lump-sum contribution equal to five years of the annual $15,000 gift tax exclusion to a beneficiary in a single year. This means that you can give up to $75,000 (if you are single) or $150,000 (as a married couple) at once, per beneficiary, without having to pay gift or estate taxes. And, if the 529 funds are used by the grandchild in the last two years of college, the funds don’t need to be reported on the FAFSA form.
529 plans are very popular among college savers, but there are other ways to save for college. In addition to purchasing U.S. Savings Bonds, college savers use traditional brokerage and bank savings accounts.
Coverdell Education Savings Accounts
Coverdells are very similar to Roths. The money you put in -- up to $2,000 per year -- is not tax-deductible, but growth and distributions are. You can set up such an account at most online brokerages and have nearly complete control over where the money is invested.
Coverdells, however, must be spent on qualified education expenses, or there is a penalty to pay. The list of qualified expenses can include things like elementary, middle, or high school tuition, as well as secondary education. One key advantage is that there's no five-year waiting period to make distributions.
Preparing Your Child for College
The Federal Student Aid website has provided checklists with the steps you can take to help your child’s chances of getting into—and being able to afford—the school of your choice. Each of the checklists—from elementary school through high school—includes items for you, such as how to support your child in his or her studies, where to set up a college savings account, and what to do when it’s time to apply for financial aid.
Additional Learning Resources
Savingforcollege.com is an independent resource for parents, providing information and tools to help meet the challenge of increasing college costs.
Department of Education
The official website of the U.S. Department of Education, Federal Student Aid posts financial aid info and tips on a regular basis.
My College Corner
My College Corner provides relevant information, cutting-edge tools, and personal admission and financial aid assistance.
USSFCU's college resource center is packed full of all things college. From savings, and grant money, to selecting a university and loan repayment strategies, you'll find what you need here.
- Saving for college isn’t just something parents should concern themselves with – kids and other family members can help contribute to a college fund for your child too. Read these tips for how to make planning for college a family affair:
- This article explains whether or not you can use a 529 college savings plan to cover the cost of online courses.
- Several colleges are opting for online classes this fall or a hybrid model. Likewise, many students are interested in online courses during the pandemic.
- Read these tips for succeeding at taking classes online.
The content on this page provides general consumer information. It is not legal advice or regulatory guidance. We do not endorse or guarantee the accuracy of third-party information.