College savings plans give the gift of education
How should you save for your child's college education? Consider these plans.
Are you looking for an impactful gift to give to the children in your life for a birthday, holiday or other special occasion? It's never too early to start saving money for your child's education, or you can make contributions for your nieces, nephews or grandchildren. Long after toys are broken or outgrown, a college savings plan will still be appreciated because you will have started a way to save for college.
These "qualified tuition programs" allow you to save for future educational costs under Section 529(b) of the Internal Revenue Code. The 529 college savings plan allows you or any other family member to open an account specifically for future higher education expenses. Residency requirements may apply. Your investment is tax-deferred and distributions from the fund are exempt from federal income tax if used for qualified education expenses.
In addition to traditional 4-year colleges, these funds may be used for community college, trade school or vocational schools. If the designated child doesn't attend higher education, the funds can be used for other family members as IRS rules allow. If you find no one will use the funds, even a future grandchild, the funds may be redeemed with taxes and a 10% penalty applied to the earnings.
Coverdell Education Savings Account (ESA)
A Coverdell ESA is a trust that lets you contribute funds earmarked for future educational costs (elementary and secondary education through college and graduate school), up to $2,000 per year, per child. Contributions can begin at birth and continue until a child turns 18 years of age. Coverdell ESA accounts are exempted from federal income tax and withdrawals are tax-free if used for qualified education expenses. In addition, the funds can be transferred to a sibling if your child doesn't need it.
UGMA and UTMA accounts
Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts are designed to hold and protect assets for the benefit of a minor. With these two accounts, you can make monetary gifts without setting up a trust. Assets can be used for any reason at any time for the benefit of the named beneficiary and the minor gains control of the funds when they reach the age of trust termination (which is age 18 to 21, depending on state and account restrictions). Assets can be used for education expenses, but because assets are considered the property of the beneficiary, there may be a high impact on financial aid.
Tips for students
Savings accounts: Students can open savings accounts when they’re young saving monetary gifts or money earned from jobs. Parents and grandparents can deposits in to these accounts to help the student save for college.
Scholarships: This is free money — and never has to be paid back. Some websites offer thousands of scholarships. There are scholarships for all kinds of things — athletics, extracurricular activities, need-based, degree being sought, minority or ethnicity status and the list goes on. Students should apply for as many scholarships as possible.
Encourage students to take AP classes that will give them college credits while still in high school. Getting a job is a good way to save money. And it’s best to only use student loans as a very last option to avoid debt upon graduating.