The Section 529 College Savings Plan is one program that can really help you to send your children to college and offers two alternatives, pre-paid tuition plans and college savings plans. Everyone knows that college isn’t cheap and the cost goes up every year. If your plan is to provide your children with a college education, you need to be saving money.
The problem is though that you have to start saving now, today. For example, if your have an eight year old child, that will only give you ten years to save under this plan for his or her college education. That may seem like a long time but when you look at the cost of a college education, it can very easily wipe out your savings and put you in the proverbial poor house if you don’t prepare for that “hit” now.
Currently (2007), the average annual cost of a college education at a state university is $18,000 with tuition, and room and board included. By contrast, the same four year education at a private four year college averages $40,000.00 per year.
Very few students can afford to pay their own way through college, so help from a parent or guardian, one or more student loans, or a scholarship are the only way they will ever get to go to college. Anyone can contribute to a Section 529 Plan, regardless of their income level.
If your child graduates from high school today and you have not made any preparation in the way of savings, you could be looking at the real possibility of borrowing $40,00000 per year for the next four years (or $160,000.00 – Today), to get your kid through college. To avoid this equilibrium train wreck, one of the options you should be looking at is a Section 529 College Savings Plan.
Basically, a Section 529 College Savings Plan allows you to save up to $12,000 per year, per child, in tax deferred money. Depending upon the state in which you live it can also allow you to pre-load each child’s account for five years, or $60,000 for each child, with that same tax deferred money. 529 College Savings Plans are federally approved, state run tax deferred student loans for qualified higher education expenses.
The Section 529 College Savings Plan, both the pre-paid tuition plans and the college savings plans, are the most popular methods of saving for college. Each plan is sponsored by individual states and colleges so you will find differences in each plan from state to state, and college to college. Section 529 plans are named after the federal tax code that governs them.
Coverdell Educational Savings Accounts
Coverdell Educational Savings accounts can be used for K-12 expenses as well as for college costs at little or no tax cost. Contributions are limited to a total of $2000.00 per year for each of your dependents. Contribution have to be made in cash to a trustee or custodial account approved by the Internal Revenue Service and have to be made before the beneficiary reaches age 18 unless the beneficiary has special needs.
While the contributions are not tax deductible, withdrawals from the account to pay qualified educational expenses are. The expenses can be either qualified higher education expenses, or qualified elementary and secondary educational expenses. These are expenses identified as necessary for the enrollment or attendance of the designated beneficiary at an eligible educational institution. A provision in the tax code allows you to transfer money from a Coverdell Educational Savings Plan into a 529 plan without triggering taxes or penalties.
Coverdell accounts and Section 529 plans can go a long way toward reducing your family’s dependence on student loans.