College is the next logical step for many newly minted high school graduates. The National Center for Education Statistics indicated that, in fall 2019, roughly 19.9 million students were slated to attend colleges and universities in the United States. Statistics Canada stated that, for the 2015-16 school year, the most recent for school statistics, just over two million students were enrolled in Canadian universities and colleges.
Families need to begin thinking about how to pay for college as early as possible. According to the Wall Street Journal, the average college graduate’s student loan debt is $37,172. And the most recent data from the Federal Reserve Bank of New York indicates the overall student loan debt in America alone is roughly $1.3 trillion. The average expense of sending a child to college has been rising at double the rate of inflation for more than a decade, offers CNBC. A robust college savings account can help future students avoid considerable debt.
The following are some ways to save for college.
• Open a tax-advantaged 529 college savings plan. The U.S. Securities and Exchange Commission says a 529 is a savings plan designed to encourage saving for future education costs. The person funding the account pays taxes on the money before it’s contributed to the 529 plan. Funds can be used for education expenses. There are two types of 529 plans: prepaid tuition plans and education savings plans. The prepaid plans allow account holders to purchase units or credits at participating colleges and universities. With education savings plans, account holders open investment accounts to save for qualified future higher education expenses, including room and board.
• Invest in a Coverdell Education Savings Account. A Coverdell account is a tax-advantaged method to contribute up to $2,000 per year to a child’s account. Individuals need to be under a certain income level to contribute. The funds will grow free of federal taxes.
• Consider a Uniform Transfer/Gift to Minors account. This is a custodial account that holds and protects assets for beneficiaries, who are typically donors’ children. The custodian controls the assets until the minor reaches legal age. The money will not grow tax-free, and it can be used for purposes other than school expenses. The account also may count against the student and parent when applying for financial aid, which is something to keep in mind.
• Open an IRA. IRAs are often associated strictly with retirement savings. However, they also can be used for qualified college payments as long as the contributions have been made for at least five years, advises Nationwide Insurance.
• Use a standard savings account. Even though it may not grow as quickly as investment accounts, routinely saving money in a savings account can be another means to saving for college.
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