Your Saving Options

There are lots of ready-made savings vehicles that make saving for college easy. Here are some of the most popular choices:

State 529 College Savings Programs

These programs allow you to save money for college through state-sponsored investment accounts.

• Earnings and withdrawals are federal tax-free.
• You can use the funds at any college or university, in any state.
• Funds are treated as parental assets—current financial aid formulas only count five percent of parental assets when calculating a family's need figure.

State 529 Prepaid Tuition Programs

These programs allow you to lock in the tuition price being charged at the state's public universities in the year when you're enrolled in the program.

• Earnings are guaranteed by the state to match in-state public tuition inflation.
• Prepaid tuition program distributions are treated like scholarships—they reduce financial need on a dollar-for-dollar basis.
• Most programs allow accumulated funds to be transferred to private or out-of-state schools, but then require you to pay the difference between the prepaid tuition price and the current price of tuition at the out-of-state school.

For more information, read Prepaid Tuition Plans.

Coverdell Education Savings Accounts (ESAs)

Formerly known as Education IRAs, these accounts let families put away $2,000 per beneficiary, per year and use the money—tax-free—to pay for college expenses.

• You can now use Coverdell funds to pay for elementary or secondary education costs.
• ESAs are counted as the student's asset, which can reduce federal financial aid eligibility under current financial aid formulas.
• There are income restrictions to make full contributions to a Coverdell account—$95,000 for a single filer and $190,000 for married couples filing jointly.

Let's say a family starts saving at the birth of a child, puts in $2,000 per year, and earns five percent interest. They will have earned over $54,000 by the time the child graduates from high school.

Roth IRAs

You may withdraw your contributions to a Roth IRA to pay for college expenses without having to pay either income tax or the ten percent early withdrawal penalty.

Any investment earnings in your Roth IRA are also available for withdrawal without the ten percent penalty, but subject to regular income tax. You may withdraw investment earnings tax-free if you're over 59 1/2 and you've had your Roth IRA for at least five years.