It’s never too early, or too late, to start saving for college. We can show you how to maximize your savings and maybe even reduce your taxes to pay for college.
Education Savings Accounts
Just because your children still are in diapers doesn’t mean it’s too early to start saving for college. An Education Savings Account (ESA), also called Coverdell Education Savings Accounts, is one planning tool that can help.
“Unlike traditional IRA contributions, Education IRA contributions aren’t tax deductible,” says Dennis Zuehlke, senior compliance analyst for CUNA Mutual Group in Madison, Wis. “However,” he adds, “withdrawals to pay qualified expenses are tax-free.”
Qualified expenses include tuition, fees, books, elementary and secondary school expenses, computer technology or equipment–even online access–that the beneficiary uses while in school, and equipment required for enrollment or attendance at nearly any postsecondary educational institution. Certain room and board expenses also may qualify.
Total contributions to a Coverdell Education Savings Account cannot exceed $2,000 per year, per child, and must be made no later than the federal income tax return deadline, not including extensions. For example, you can make 2002 contributions until April 15, 2003. Certain income limits apply.
You can contribute to a Coverdell Account until the child reaches age 18. Children have up until age 30 to use the funds.
You cannot contribute to a Coverdell in the same year you contribute to a state prepaid tuition plan.
“An automatic payroll deduction at your credit union can make contributing to a Coverdell easy,” says Zuehlke. “The earlier you start the better.”
To open an IRA, contact our Member Services Department or call us at 535-0191 or toll-free at 1(800)828-8691.
Plan Ahead to Get College Financial Aid
If you’re going to college and considering a student loan, apply as soon as you’re accepted to school. The sooner you get in your financial aid application, the better chance you’ll have of receiving funds.
Getting financial help to attend college takes ingenuity, inspiration, and sometimes, duct tape.
Ingenuity is required to match your student profile to the many different types of financial assistance offered by colleges, community organizations, lenders, and other sources. Inspiration comes from being committed to obtaining an education or fulfilling a career dream. As for the duct tape, it represents the unexpected sources that may help you stick together a financial aid package. Read more.
Digging for Gold: How to Find College Scholarships
According to College Board estimates, the annual cost of attending a public four-year college (including tuition, room, board, transportation, books, and other expenses) is $12,841 if you’re a resident and $19,188 if you’re an out-of-state student. Private four-year schools average about $27,600 annually. The College Board is a national, nonprofit membership association in New York that informs students about college opportunities. Read more .
Student Loans More Affordable Than Ever
In the market for a student loan? You’re in luck. Student loans have low rates and don’t require credit checks or collateral.
Congress revived student loans by passing the Higher Education Act, which restructures interest rates under the Federal Family Education Loan Program. While the student is in school, the loan rate is the 91-day Treasury bill (T-bill) plus 1.7 percentage points; during repayment, it’s the 91-day T-bill plus 2.3 percentage points; and no matter what, the annual percentage rate cannot exceed 8.25% at any time.
And just how much will you need to borrow? First, calculate your approximate expenses for the year, including all fixed costs–tuition, room and board–and other indirect costs–personal expenses and transportation costs. A college can provide you with actual fixed costs and may even be able to give you typical indirect expenses at its campus. Or, use the College Board’s estimated in-state costs as a guideline: $12,841 at a public college and $27,677 at a private college or university.
If college is a few years away, take today’s guideline and factor in annual increases. The College Board says college tuition costs increase, on average, 5% each year. Once you have an idea how much you’ll need for the year, you’re ready to do the math.
Take your estimated expenses and subtract scholarship/financial aid money you’ve received, savings, and any other money you plan to put toward expenses. The remaining amount is what you may consider borrowing.
- When determining financial aid eligibility, the assets of the child typically are assessed at a rate of 35% for public schools (25% for private), as opposed to a current maximum assessment rate of 5.7% for the assets of the parent. These rates apply to the total value of the asset, including both principal and accumulated interest. This rate difference outweighs the typical 13% tax savings resulting from the child’s lower tax bracket (and those tax savings only are on earnings, not on principal).
- When determining need based on the assets of the parents, financial aid formulas contain an asset protection based on the age of the older parent. That protection shields some of the family’s investments (typically between $35,000 and $70,000), in addition to any money in a qualified retirement plan (IRA [individual retirement account] or 401(k)).
There are no asset protections in place for money in the child’s name.
The formula used by the federal government ignores the value of the family’s primary residence. Note, however, that the formulas used by many schools do not ignore the value of the primary residence.
To learn how specific college savings accounts are treated by financial aid formulas, visit the SmartMoney College-Savings Superpage at www.smartmoney.com.
Each year Progressions grants $500 scholarships to two lucky members. Applications for the scholarship are available after April 1st of each year and closes the end of April.