There’s no denying it — higher education doesn’t come cheap. So, how do you pay for big-ticket schooling? Designated college savings plans, some with tax advantages, help immensely if you start saving early and keep contributing until it’s time for the college journey to begin. Here’s a preview of some popular plans:
Coverdell Education Savings Accounts
Parents can contribute up to $2,000 per year per beneficiary under the age of 18 and these deposits will grow tax free until distributed. Though contributions are not tax deductible, the funds can be withdrawn without incurring a federal tax or penalty when used for qualified secondary education expenses, including tuition and fees, books, supplies, equipment, and room and board. Contribution limits are based on the contributor’s modified adjusted gross income. Various financial institutions such as Charles Schwab, Janus, T. Rowe Price and USAA offer low-cost (an annual account maintenance fee of a few dollars) Coverdell Education Savings Accounts. For more information, go to www.savingforcollege.com.
Qualified Tuition Programs (a.k.a. QTPs or 529 plans)
A 529 plan is a tax-advantaged investment plan designed to encourage saving for future higher education expenses. There are many 529 plans available and plans can differ widely by investment options offered and by the unique features and benefits offered by each state. There are two types of 529 plans: prepaid tuition and savings. The earnings from 529 plans are tax free when used on qualified education expenses such as tuition, student fees, and books and supplies. Thirty-four states and the District of Columbia offer a deduction or credit from state income tax based on contribution to a 529 plan. Plans are sold directly by states and program managers (at a lower cost to you) or by financial brokers (at a higher cost to you, but usually offer more investment options). You don’t have to buy one from the state where you reside; you can comparison shop and choose one that offers the best features for your saving needs. Check out www.collegesavings.org for detailed information about all 529 plans.
Parents, grandparents, friends and family can join BabyMint for free. Each time a member shops at one of the hundreds of participating retailers, cash rebates ranging from 1% to 26% are automatically deposited into the educational savings account (including 529 and Coverdell savings accounts) you designate or used to make a payment on student loans. You can also receive a rebate check sent directly to you. Friends or family members can direct their contributions into a child’s savings account, choose to receive a check, or have their earnings swept into the parents’ BabyMint account, at which point the parent would direct where the contributions go. Better yet, if you also join the BabyMint Tuition Rewards Program, every dollar in rebates you earn is matched by a dollar off of tuition at 175 participating U.S. colleges and universities. For more information, visit www.babymint.com.
The KidIRA Foundation’s goals are simple: to educate and empower families to create an early, tax-advantaged, secure financial strategy for college savings. It is free to join KidIRA. Minors are allowed to earn income by becoming independent marketing associates of the foundation, obtaining supporters and clients (such as family and friends) and referring the preferred list of thousands of participating stores, offers and discounts. The child earns commission on sales when his or her supporters or clients shop with the preferred merchants, and the commissions are paid directly to the child, at which point the parent and child can decided how to invest the earnings, typically in their KidIRA, a custodial Roth IRA plan. For more information, visit www.kidira.org.
The Smart Start College Plan offered by life insurance company Gerber Life is an endowment life insurance policy with monthly premiums as low as about $1 a day. Benefits are paid after a certain number of years, not necessarily after a person’s death. The plan allows you to choose a benefit amount from $10,000 to $150,000 and a maturity period of 10 to 20 years. The face amount and death benefit amount are both guaranteed. However, since this is a life insurance policy, the person to be insured (usually the parent) must answer some health-related questions. To sign up, visit www.gerberlife.com.
Sallie Mae’s Upromise program allows you to earn money toward college expenses by doing the things you do every day — dining out, shopping online, buying groceries and more. A portion of what you spend at participating retailers goes into your Upromise account and can then be invested in a high-yield Sallie Mae savings account, invested in a Upromise 529 plan or used to pay down Sallie Mae student loans. You can even request a check from your account to pay for educational expenses. You can add your existing credit or debit cards to the program or apply for one of two Bank of America Upromise credit cards (one that rewards gas and grocery purchases, the other that rewards dining and grocery purchases). The cards offer 1% for college on everything you buy with the card and 10% extra on eligible grocery and drug store purchases. Go to www.upromise.com for more info.
—Maureen Healy, Brand Publishing WriterCopyright © 2014, Los Angeles Times