It's becoming harder and harder to save enough for college. For example, if you saved $100 every month for 10 years and earned 8% interest along the way, you’d have just $18,295 at the end of the 10 years. If college costs go up at the same rate as they have over the past 10 years, the average total cost of attendance, on average, at a public university will be $90,292, and $170,500 at a private university.
There are several popular ways to save for college that allow maximum return on your savings, but even with these there’s still a good chance you’ll need financial aid, student loans or some other financing to cover the costs of a degree.
Three of the most popular long-term savings plans for higher education are:
529 Prepaid Tuition Plans
A 529 Prepaid Tuition Plan is a tax-exempt way to lock in future tuition rates at their current levels. However the amount of savings has a big effect on eligibility for financial aid because the savings amount is directly deducted from potential need-based aid. Characteristics include:
- Lock in future tuition for in-state public colleges at current levels
- If the student decides to attend a college that is out-of-state, or private and in-state, only the average public school rate is paid out
- Can be used for tuition, room and board at the school for half-time or full-time students, computers (if required) and other qualified expenses
- Money controlled by the account owner, not the beneficiary
- No restrictions on choice of accredited in-state college
- No date by which funds must be used
- May not be enough to pay for the full cost of getting a college degree
Find more information on 529 Prepaid Tuition Plan
529 College Savings Plan
A 529 College Savings Plan is a tax-exempt way to save money for college without having a major negative impact on eligibility for financial aid. Characteristics include:
- More flexible than 529 Prepaid Tuition Plans
- Does not offer a guaranteed locked-in tuition rate
- Can be used for tuition, room and board, computers (if required), and many other qualified expenses
Find more information on 529 College Savings Plan
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts, also called Education IRAs, are a way for parents to save for college before children go to school. Because of contribution limits, these are typically not a practical way to save enough money for a four-year education, especially for families with multiple children. Characteristics include:
- Contributions can be made until students are 18 years old
- Generally best that the account owner be a parent, to lessen the impact on the student's financial aid eligibility
- In many cases, 529 Savings Plans, with their higher contribution limits and tax advantages, will be more useful than a Coverdell Education Savings Account
- All money in the account must be spent by the time the beneficiary reaches age 30 or it becomes a taxable distribution with a penalty of 10 percent
- May affect financial aid eligibility if the student is the account owner
- There is a maximum contribution of $2,000 per year for each beneficiary
- Contributions to a Coverdell Account are not deductible on federal or state income tax — only earnings or an increase in account value are exempt
Find more information on Coverdell ESAs