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College Savings Accounts

Unfortunately, not everybody is going to land a full-tuition scholarship, and federal student financial aid seldom takes care of all college costs. If you’re a parent or relative looking ahead to cover costs and reduce loans, finding scholarships is a great step, but also consider planning ahead and look into college savings plans.

529 Savings Plans

529 Plans fluctuate with the stock market, but are still a good idea if you choose your plan wisely and have plenty of time to save. Many 529 Plans allow you to move your savings into a conservative portfolio when the student nears college. While there are limits on how many changes can be made to a 529 Plan annually, they are flexible so it is easy to find one that works for you. Plus, 529 Plans can be taken out in the parent’s name so there will be minimal effect on a student’s financial aid eligibility.

Additionally, maximum contribution limits are high, minimum contribution requirements are low, there are no income limits/restrictions, and many states offer incentives for residents who contribute to their plans. As an added bonus, many accept contributions from anybody, not just those named on the account. For example, some plans allow a portion of credit card purchases or purchases at certain stores to go toward a student’s .

Prepaid Tuition Savings Plans

If you’re hesitant about investing money for college in the stock market you should consider another type of 529 Plan known as a Prepaid Tuition Plan. Prepaid Tuition Plans allow families to contribute an immediate fixed dollar amount in exchange for a portion of tuition being covered in the future. Several states do this for their state colleges and universities. The Independent 529 Plan, which is accepted by over 200 private colleges, also makes fixed contributions to portions of future tuition. Both of these varieties eliminates they worry about tuition inflation. However if tuition holds steady or decreses between now and when the student starts college, a prepaid plan might not be the most lucrative option.

Coverdell ESA

Coverdell Education Savings Accounts are similar to 529 Plans, except they are sold banks and brokerages rather than the state. Since there aren’t any state ties, there aren’t any resident limitations. However banks can charge their own management fees and there also aren’t any tax breaks for enrolling in a Coverdell ESA.

Coverdell Accounts allow more flexible investment options and unlimited changes to investments. They can also be used to pay for high school and elementary school expenses, in addition to college costs. Both Coverdell and 529 Plans can be used to pay for tuition and fees, books and supplies, room and board if over half-time, and other qualified educational expenses.

A major limitation to the Coverdell ESA is the $2,000 annual contribution cap. This is the limit per account holder, not per contributor. Additionally, individuals must have an adjusted gross income of $110,000 or below to partially contribute, and $95,000 or below to fully contribute. Coverdell accounts are held in the beneficiary’s name, so they can hurt the student on the FAFSA. They also must be used or cashed out by the time the beneficiary turns 30, and must go to the beneficiary, while 529 Plans can be given back to the parent if the student chooses not to go to college.

Roth IRA

Roth IRA’s are typically used as retirement accounts but can be used to save for school. As long as you’re withdrawing contributions, rather than earnings, there is no penalty if you are using the money from your IRA for educational expenses. However, a college savings plan might be the better way to go if you’re setting up an account specifically for your student since contributions to a Roth IRA must come from the beneficiary earned income. Dipping into your retirement funds to pay for college is widely regarded as a less than ideal choice by financial experts. If you choose to take it, the option is there.


The Uniform Transfer to Minors Act allows assets to be given as gifts to minors without the establishment of a trust. While the options explored up to this point have been savings accounts or investments, UTMA covers everything, including property. An adult manages these assets in a custodial account until the owner reaches the age of 18 or 21, depending on the state. In the meantime, the funds in the account can be used to benefit the child, including taking care of educational expenses. Once the owner reaches the age of majority, the assets are theirs to use as they please. This can mean paying for school, or it can mean making less desirable financial choices. Since these assets belong to the student, they would count against them for student financial aid.

Last Edited: November 2015

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