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Popular Ways to Save for College
The cost of going to college has been increasing at a faster rate than the consumer price index and median family income. In fact, during the past 10 years, inflation of college tuition averaged about 6% per year, whereas general price inflation was half that at 3%. It is further projected that in 10 years from now, the cost of going to college for four years, which includes tuition, room, and board, could amount to a total of $60,000 to $100,000.
To save money in order to pay for the cost of higher education, there are several savings alternatives. The three most popular ways to accumulate money for college funding are listed in the following table. The comparison of these three savings methods considers implications, restrictions, and advantages. Other methods to save for college can be viewed in our article Three Additional Ways to Save for College
Comparison of Three Ways to Save for College
| Considerations | Section 529 Plan | Coverdell(Education)IRA | Custodial Trusts |
| Tax Benefits | Earnings exempt from Federal income tax if used for qualified higher education expenses | Earnings exempt from Federal income tax if used for qualified higher education expenses | When a child is under 14, $750 of unearned income is tax exempt; next $750 is taxed at the child's rate; the rest at parents' rate. After child turns 14, all earnings taxed at the child's rate |
| How Much Can Be Invested? | Varies by state. Currently the highest lifetime account balance limit is $246,000 | $2000 per year | No limit |
| Qualified Expenses | Tuition, fees, books, supplies, room and board, equipment | Tuition, fees, books, supplies, room and board, equipment | Any expense |
| Financial Aid Treatment | Savings plans, parent's assets, prepaid plans may reduce aid dollar-for-dollar | Student's assets | Student's assets |
| Who Makes Investment Decision? | State sponsor with input from program manager | Owner | Custodian before the child turns 18 or 21; after that, the child |
| Income Restriction? | No | Yes | No |
| Impact on Education Tax Credits? | No | Yes | No |
| Flexibility | Earnings on non-qualified withdrawals taxed at owner's rate plus a minimum of 10% penalty | Earnings on non-qualified withdrawals taxed at owner's rate; 10% penalty on earnings | Money can be withdrawn for benefit of the child |
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