529s, Coverdell ESAs, and More: A Comprehensive Guide to Saving for College

Let’s face it – college costs are increasing, and so is the financial strain on students and parents. According to a recent report, the average approximate budget for full-time undergraduate students ranges from $18,830 to $55,800, depending on the type of institute, including public colleges and private non-profit ones. The said estimates include boarding fees, tuition costs, and other mandatory expenses.

These figures may seem concerning. But if you strategize around saving for college, you may tackle the costs smartly. There are numerous ways to save for higher education, and this post explores the most effective ones. Read on to find out everything involved!

The Ideal Time to Start Saving for College

The ideal time to start saving for college typically depends on different factors, including your age and socioeconomic condition. However, most financial experts agree you should start as early as possible. The sooner you start saving, the less reliance you will have on borrowing or diverting money from other essential expenditures.

It’s always wise to join a side hustle to set aside some money for your college funds. However, in case you fail to manage one, you can talk to your parents and ask them to allocate a certain portion of their income every month for your higher studies.

If you are already earning, you should develop a consistent saving habit. For example, earning $500 per month from your part-time job can save 20% of the amount ($100) monthly. This will accumulate to $1200 yearly, and if you use the right saving strategies, this amount can turn into a substantial one, which you can later use for your college education.

Remember, this approach will help you reduce your financial burden in the future, and you will probably experience a smooth transition into postsecondary education.

What Amount Should You Set Aside for College

While several factors, like your financial condition and plans, influence your savings requirements, there’s a universal rule. You should dedicate a definite part of your income to your college savings.

Suppose you plan to join an out-of-state college that charges $60,000 for tuition and fees, $54,000 for accommodation, and $6,000 for books over four years. This sums up to $1,20,000.

You have five years in your hand to accumulate the amount. In this scenario, you will have to save $24,000 every year. If you are entitled to any grants, scholarships, or financial aid, you can deduct them from your total projected college expenses and focus on accumulating the remaining amount.

The Best Alternatives to Consider When Paying for College

Now that you know the basics, let’s walk you through the seven best alternatives to accumulate money for college expenses.

Consider Coverdell

If you plan to save for your child’s education, consider opening a Coverdell Education Savings Account (ESA). Instituted by the U.S. government. Its purpose is to assist families in accumulating funds for their children’s education-related expenses. Remember, the beneficiary should be under 18 years old when the account is set up unless they have special needs.

For instance, let’s say you have a 10-year-old child. You could start a Coverdell ESA for them now and contribute up to $2,000 annually, which is the maximum cap for total contributions. Thus, if anyone from the family also wants to contribute, they must ensure the total doesn’t exceed the given limit.

Coverdell ESAs offer a great deal of flexibility as they can be used to cover a broad range of expenses for students enrolled in eligible schools. These funds can be utilized for higher education and primary and secondary schools (grades K–12).

The distributions from Coverdell ESAs are tax-free, provided they don’t exceed your child’s yearly adjusted qualified education expenses. However, if the distributions are more than the expenses, you’ll pay taxes on the gains at your child’s rate, which is typically lower than yours.

For example, if you withdraw $3,000 in one year but only $2,500 is spent on eligible educational expenses, the remaining $500 will be taxed.

However, remember that Coverdell ESAs come with income restrictions. The adjusted gross income (AGI) for single taxpayers should be $95,000 or less; for married individuals, it should be $190,000 or less to make a total $2,000 contribution.

If your AGI exceeds these limits, your contribution limit starts to decrease and gets phased out at $110,000 for single taxpayers and $220,000 for joint filers.

Invest in 529s

If you’re looking to save for future education costs, a 529 plan could be an intelligent choice. These tax-advantaged savings plans, named after Section 529 of the federal tax code, were initially created for postsecondary education expenses. However, recent changes have made them even more versatile.

There are two types of 529 plans – education savings and prepaid tuition.

• With an education savings plan, your investments grow tax-deferred….