Saving Accounts for Students
Note: This article is written specifically for parents of future college students.
Most students don’t get serious about planning for college until their sophomore or junior year of high school. There are plenty of steps you can take long beforehand, though, to ensure that your child doesn’t wind up in debt soon after entering college. If you’re looking to start a savings account for your future college student’s educational expenses, there are plenty of options available, two of the most popular being the Coverdell ESA and the 529 plan.
ESA or Education Savings Account
One of the most popular options is a Coverdell Education Savings Account, or ESA.
The maximum contribution per student per year is $2,000, so if you open an account for your child on their twelfth birthday, they will be able to withdraw up to $12,000 by the time they turn 18. This of course won’t cover all or even most of your child’s expenses, but having even a relatively small amount of money set aside will make their transition to college far more comfortable.
ESAs can be provided at any financial institution that serves traditional IRAs. You can invest your contribution in stocks, bonds, mutual funds, or any other qualifying investments provided by the sponsoring institution. The money in your ESA will grow tax-free; distribution is tax-free as well, so you won’t have to pay anything to make a withdrawal. This money must be used specifically for educational expenses, ranging from tuition to textbooks to room and board. If used for non-educational expenses, the funds will be taxed as regular income, alongside an additional 10% tax.
Like many savings accounts, an ESA can have a negative effect on your eligibility for financial aid. Up to 5.64% of the account’s value will be included in your Expected Family Contribution (EFC), the amount of money you are expected to pay before scholarships and grants are factored in. This is significantly lower than what most other accounts will cost you, though.
- Money can be deposited into the student’s account until they turn 18. If your student has special needs, they may be entitled to a Special Needs Educational Savings Account, which can continue to receive contributions after they turn 18. (Note: still trying to find link to additional information about this)
- Any money in the ESA must be spent by the time the student turns 30.
- The contributor’s adjusted gross income must be less than $95,000 for a single account, $190,000 for a joint account.
529 Plans
A 529 Plan is very similar to an ESA, with the main difference being that you can set aside more than $2,000 a year per student.
529 plans are state-run, and most states offer a tax deduction or credit on contributions made to the account. Plans vary from state to state; in South Carolina, for instance, you can contribute up to $426,000 to your student’s account. If your home state doesn’t offer a tax break, or limits your contribution, you can always invest in a different state’s plan.
Higher contribution limits and greater tax benefits make 529 plans the more popular choice over ESAs, but it’s important to figure out which plan suits your individual needs before choosing the one that’s right for you.
Pennsylvania has a special program available to help its babies get a head start on education savings with $100 from Keystone Scholars. Statewide registration is available for babies born or due in 2019.
Research has shown that a baby with education savings at birth is more likely to pursue and complete some form of education after high school. That’s why the PA Treasury is investing $100 for every baby born or adopted in 2019 to be used for the baby’s future higher education expenses.
Nevada, Rhode Island, Connecticut, and Maine all have statewide higher educational savings plans like Keystone Scholars. If you do not live in any of these states, check your own state for similar programs.
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