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College Savings Strategies

From a 529 to a Coverdell ESA and beyond



$8,893. $30,094.

That first figure was the average tuition paid last year for in-state residents at a four-year public university; the second, even scarier number represents the 2013-14 tuition at a private university, according to the College Board’s Annual Survey of Colleges. Room, board, books and supplies are extra.

Expected Family Contribution
How much you’ll need to save for college will depend on the type of school your child is interested in and your family’s financial situation. The Expected Family Contribution (EFC) is used to determine your financial aid award and is based on your family’s size, income, assets, benefits and the number of family members who will be attending college that year.  Online calculators at SavingforCollege.com and CollegeBoard.org can help you determine what your EFC will be and how much you’ll need to save for your goals.

“The biggest mistake families across all economic levels make is that they don’t plan for college,” says Thomas Butler, founder and owner of ThomEducates and director of the Philadelphia College Prep Roundtable. “Federal, state and institutional grants and loans usually won’t cover the entire cost of a traditional four-year college experience.”

Even if it’s only a few dollars a month, it’s best to start saving as soon as possible after your child’s birth so your money has the most time to grow. Financial advisors can help, but aren’t necessary if you want to avoid their fees. Here’s a roundup of the best ways to save now for your child’s future tuition.

529 savings plans

529 Benefits for State Residents
Many 529 state plans are open to nonresidents, but investing in your own state’s plan has advantages.
Delaware
• Earnings and qualified withdrawals are exempt from Delaware state income tax.
• The Fidelity Investments 529 College Savings Rewards American Express offers 2 percent cash back on purchases when directed into your DE 529.
New Jersey
• Earnings and qualified withdrawals are exempt from New Jersey state income tax.
• New Jersey will contribute up to $1,500 to students attending New Jersey undergraduate schools if a minimum contribution is made.
• The first $25,000 in 529 savings is excluded from consideration in New Jersey financial aid eligibility.
Pennsylvania
• Earnings and qualified withdrawals are exempt from Pennsylvania state income tax. (Pennsylvania also allows state income tax deductions for contributions to any state’s plan.)
• 529 savings are excluded from consideration in Pennsylvania financial aid eligibility.
• The SAGE Scholars Tuition Rewards program matches a percentage of the money residents invest in a PA 529 plan to be used at participating schools.

A 529 savings plan is one of the best ways to save for college. Anyone can contribute, and all plans are exempt from federal taxes when used for qualified higher education expenses, including tuition, room and board, books, equipment and special needs services. If your child doesn’t go to college, you can change the beneficiary to another family member or withdraw the money, though you must pay taxes and a 10 percent penalty for withdrawal.

Each state maintains its own 529 plan. Delaware, New Jersey and Pennsylvania offer 529 savings plans that can be opened with as little as $15 to $25. Pennsylvania also offers a Guaranteed Savings Plan (GSP) that allows you to purchase future tuition for most of the country’s community colleges, technical schools and state and private universities at today’s prices. For instance, if you invest enough money for one semester at a private college today, the plan will guarantee enough money for one semester at that school in the future, regardless of tuition increases. 

Coverdell ESA

A Coverdell Education Savings Account (ESA) can be used for college as well as elementary and secondary school expenses. Coverdell ESAs have more investment options than 529s, but your modified adjusted gross income must be below $110,000 for a single taxpayer or $220,000 for a married couple filing jointly to contribute, and there is a $2,000 per year contribution limit. Like 529s, earnings and qualified withdrawals are tax-free.

Bonds and CDs

U.S. savings bonds and CDs are low-risk investments guaranteed to yield a fixed percentage at maturity. If your income falls below a certain level, the interest earned on Series EE and Series I Bonds is tax free when redeemed to pay higher education expenses or when rolled over into a 529 plan. If you expect your income level to rise above these levels in an upcoming year, Fred Amrein, founding principal of Collegeaffordability.com and Amrein Financial in Wynnewood, PA, recommends converting the bond into a 529 plan before that happens.

Rebate programs

You can earn money for college by enrolling your credit and debit cards in a free rebate program like UPromise.com. Every time you shop at one of the hundreds of retailers in the site’s network, you earn a percentage of your spending back to be used for college expenses. Several credit cards also offer a percentage of money back on any purchases you make on their card to be used for college expenses.

Playing Catch-up

If your child is in high school and you haven’t saved, take a deep breath. “It’s never too late to put money in a 529,” says Fred Amrein.

PA 529 tax deductions make it worthwhile for Pennsylvania residents to invest even while their child is in college. Investing money in a PA 529 and paying the qualified expenses from it will save around 3 percent over paying the money directly to college tuition.

If you won’t be retiring soon after your child completes college, you may consider borrowing from your IRA, particularly a Roth IRA, to help pay for college. The 10 percent penalty for early withdrawal is waived for qualified higher education expenses.

Susan Stopper writes frequently for MetroKids.

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