Saving for college could be an investment that pays for itself. But for many families, it can also be a huge strain on your budget.
If you’re looking into ways to help fund your child’s educational future, read on for our handy guide.
Building a college savings
There’s no single “best” way to manage higher education costs. It all comes down to your family, your goals and your finances.
529 plan. A 529 plan allows money to grow in a tax-deferred account. It can be withdrawn tax-free for qualified, education-related expenses at colleges, vocational programs and apprenticeships. The funds from a 529 plan may even be applied toward up to $10,000 in student loan debt.
Education Savings Account (ESA) or Education IRA. An ESA allows investments of up to $2,000 (after tax) per child, per year for tax-free growth. The rate at which it grows varies based on the investments you choose, but it generally offers a higher rate of return compared to a regular savings account.
Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA). While savers can use a UTMA and a UGMA to put away money for college with reduced taxes, they can also be used for non-educational costs. Similar to mutual funds, they give parents control of the funds until the child reaches age 18 or 21 (varies by state), at which point they may choose how to allocate the funds.
Remember, the sooner a plan is opened, the more time investments will have to grow.
Tax savings for current students
Once your child is enrolled in higher education, he or she may also want to take advantage of these tax-savings opportunities. Remember, it’s always best to speak with a tax professional regarding your family’s personal situation.
- American Opportunity Credit. For qualifying students, this credit pays for up to the first $2,000 spent on tuition, fees, books and more. Plus, it’s applicable for all four years of undergraduate studies.
- Lifetime Learning Credit. The Lifetime Learning Credit gives students a tax credit equal to 20% of their tuition and related expenses up to $10,000. The credit maximum is $2,000.
- Tuition and fees deduction. Independent students may qualify for a tax deduction of as much as $4,000.
A plan to save
Let’s face it. Higher education costs are just that — high. The average student attending an in-state, public four-year institution spends about $25,707 in a single academic year. The average student attending a private, nonprofit university spends a whopping $54,501 per academic year. While there are student loans, scholarships and financial aid opportunities, any amount saved will help chip away at the steep costs.
Just like retirement and tax planning, figuring out how to pay for college is an important discussion to have with your trusted financial advisor. Need assistance? Count on Magone & Company as a knowledgeable financial resource. Reach out today at (973) 301-2300.