Saving for College

Saving for college and universityMultiple Options exist for saving for college. As with any savings or pre-paid tuition plan, the earlier you begin the greater potential for a higher return on your investment.

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Listed below are three savings methods designed specifically for college savings.

State-Sponsored Section 529 Plans

Named after a section of the Internal Revenue Code, the Qualified State Tuition Program, or 529 Plan, formally recognizes the need for families to set aside money for college.

Section 529 Plans are federal tax advantage savings plans and pre-paid tuition plans that allow money to be set aside to grow federally tax free, for future post-secondary education, tuition, fees, supplies, books and certain room and board costs. Programs are administered by a state agency and differ from state to state. Students are not required to attend college in the state where their 529 plan money is invested. They can use the assets at any accredited post-secondary institution in the United States.

Private College 529 Plan

Private College 529 Plan offers something no other 529 plan can; a guaranteed way to purchase tuition at today's rates at participating private colleges and universities across the country. You get tomorrow's tuition at today's prices, for up to 30 years after it was purchased ... guaranteed!

Coverdell Education Savings Account

Created in 1997 as Education IRAs, and improved dramatically in 2001, Coverdell ESAs are a very compelling savings vehicle for parents who meet the contribution limits.

While both Coverdell ESAs and Section 529 plans offer the prospect of potentially tax-free earnings, Coverdells offer the flexibility to choose the specific investments you desire, unlike Section 529s. This is a big advantage to using a Coverdell for those who want to direct their own investment program. (Most fund companies or brokerages can set up a Coverdell ESA for you, allowing you access to their full range of investment products.)

In addition, the favored tax treatment of Coverdell earnings extend to cover elementary and secondary school expenses. The list of qualified expenses is lengthy, and includes both obvious items like tuition and books, as well as non-obvious items like uniforms, transportation, even computers and Internet access for the family during the years the beneficiary is in school.

It's worth noting that contributors are now allowed to contribute to both a Coverdell ESA and Section 529 plan in the same year (although contributions to both types of plans are combined for gift tax purposes). This is great for parents who want to save more than the $2,000 per year allowed in a Coverdell, or for parents who want to save for college in a 529 plan while also saving for elementary and secondary school costs in a Coverdell ESA.