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Three Additional 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 6% compared to general price of inflation of 3%. It is further projected that within 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.
The table below compares three alternative methods to accumulate funds for college. You can read about the most common methods for saving for college in our article Popular Ways to Save for College
Comparison of Three Additional Ways to Save for College
| Considerations |
Series EE and I Savings Bonds |
Classic and Roth IRAs |
Mutual Funds |
| Tax Benefits |
Earnings state and local income tax exempt; Federal income tax deferred. For qualified taxpayer, earnings fully or partially excludable from Federal income tax if used for qualified higher education expenses |
Classic IRA may be tax deductible and entire proceeds taxed at the owner’s rate; Roth IRA earnings tax exempt if taken out after the owner turns 59 ˝ |
No special tax benefits |
| How Much Can Be Invested? |
Up to $30,000/$15,000 per year for I/EE bonds |
2002: $3,000
2003: $3,000
3004: $3,000
2005: $4,000
2006: $4,000
2007: $4,000
2008: $5,000 |
No limit |
| Qualified Expenses |
Tuition and fees only |
Tuition, fees, books, supplies, equipment, room and board |
Any expense |
| Financial Aid Treatment |
Parents' assets if education expenses are for a child. Student’s assets if education expenses are for oneself |
Not considered in the EFC calculation |
Parents’ assets |
| Who Makes Investment Decision? |
Guaranteed returns |
Owner |
Owner |
| Income Restrictions? |
No |
Yes |
No |
| Impact on Education Tax Credit? |
Yes |
No |
No |
| Flexibility |
Can be redeemed after 6 months. A 3 month earnings penalty applies to redemption within 5 years of issuance |
No penalty on early withdrawals if used for higher education expenses. For Roth IRA, earnings of early withdrawals taxed at the owner’s rate |
Money can be withdrawn at any time for any purpose. |
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