Saving For A Child’s Education

Do you have a child who will attend college in the future? Rising student loan interest rates provide an extra incentive for you to save more money towards your child’s education.

What is the best way to save for a child’s education these days? With all the options available to you today, it’s important to understand the basics:

• 529 Plans.  With these state sponsored education savings plan, you purchase into a managed investment portfolio based on when your child will attend college. Amounts contributed grow tax-deferred.
• Pre-paid Tuition Programs.  If you’re concerned that the cost of college will rise quicker than your investment portfolio, take a look at pre-paid tuition programs. Many states offer these college savings programs on behalf of colleges and universities within their state. Or you can check out the Independent 529 Plan, which is a national pre-paid tuition program representing approximately 250 schools throughout the country.
• Coverdell Education Savings Accounts.  Formerly known as Education IRAs, you can contribute up to $2,000 per beneficiary per year into an ESA. You’re not allowed to contribute into an ESA if your adjusted gross income exceeds certain limits. Amounts contributed grow tax-free, as long as the money is used for your child’s K-12 or college tuition or other allowable education expenses.
• U.S. Government Bonds.  Another way to save for a child’s education is with EE Bonds or I Bonds. Both of these bonds can be purchased at a bank or from TreasuryDirect.gov. As long as your child’s name isn’t on the bond, the interest isn’t taxable to you provided the total bond proceeds don’t exceed the amount spent for tuition and fees. This tax break too has a low phase out based on adjusted gross income.
• Two Tax Credits.  If you’re paying for a child’s tuition out of your current earnings, don’t overlook the Hope Scholarship Credit, which saves you up to $1,500 per year in taxes each of the first two years of college. Another option is the Lifetime Learning Credit, which saves you up to $2,000 in taxes per year. Both of these credits phase out this year once your income exceeds $107,000 if married or $53,000 if single.
• Employ Your Child.  You can also even contribute to a Roth IRA each year, which would be available to pay for your child’s college expenses, fund first time homebuyer costs, or grow tax-free over the next fifty years or more.