How to Pay for College for Your Child
When kids are young, many parents assume that they’ll go to college; however, despite this early assumption, parents often wait years to take the steps to make this goal a reality. As your child gets closer to college age, be sure to choose the college funds that best fit you and your family.
- 529 Savings Account. A 529 plan is a tax-advantaged account that invests savings to generate more earning power than a traditional savings account. A 529 is easy to open, has no minimum contribution, and allows friends and family to contribute, making it a popular tool to help meet education savings goals.
- Coverdell Education Savings Account (ESA). An ESA is like a 529 in that it allows savings contributions to grow more effectively than they would in a traditional savings account. An ESA allows account owners more investment freedom; however, other rules and restrictions apply in terms of contribution limits and tax benefits.
- IRAs. Retirement savings can now be used as a source of funds to help pay for college. Regulations have changed, so you’ll avoid the 10% tax on early withdrawals before age 59½ if you use the money to pay for qualified education expenses. Rules are different for traditional and Roth IRAs, so be sure to understand the pros and cons before using retirement funds.
- Financial Aid. All students going to college should fill out the Free Application for Student Aid1 (FAFSA) to check eligibility for federal assistance. The best part about financial aid is that it can help families learn about assistance options they might not have considered. The scholarships, grants, and work studies that may be offered are all essentially “free” money — they do not have to be paid back.
- Loans. Public and private loans area available to students and parents to provide the extra funds needed to help pay for college. When considering loans, applicants should shop around to ensure they’re getting the best rates, and understand all the terms and conditions of the loans. It’s important to pay extra attention to how interest is calculated when the student is in school.