When it comes to starting a college fund, the options can seem endless and overwhelming. There are plenty of varying choices available and it’s important to research your possibilities before picking a route. See below for different options that might be most suitable for you and your family when starting a college fund.
1. Grants
The U.S. Department of Education (ED) has several different federal grants for students attending universities or four-year colleges. Grants differ from loans because many of them do not have to be paid back.
Different types of grants include:
- A Federal Pell Grant
- Federal Supplemental Educational Opportunity Grants (FSEOGs)
Learn more about grants and who qualifies at www.ed.gov.
2. Section 529 Plans
A Section 529 plan is a tax-advantaged investment plan that is issued and operated by a state or educational institution. The rules will vary by the state you’re in, but all 50 states offer these plans and will help you save for education.
There are two major types of 529 plans:
- College Savings Plans
- Prepaid Tuition Plans
It’s important to note the college savings plans offer tax-deferred earnings, however, your earnings are subject to federal income taxes, applicable state income taxes and an additional 10% federal tax if there are any non-qualified withdrawals. Depending on the state you open your account in, your maximum contribution amount will range.
Prepaid tuition plans allow you to secure a tuition at a set rate before your child attends college (think years before). The money eventually comes out to pay the tuition and is not taxable; however, not every college accepts the prepaid tuition plan.
Be sure to look into the additional fees, expenses and tax ramifications included with 529 plans that you need to consider before choosing the right 529 plan for your family.
3. Coverdell Education Savings Account
You may have previously heard about this option as an educational IRA, but recently named the Coverdell Education Savings Account (ESA), it allows you to make contributions until your child is 18 in an account that is tax-deferred. Money can be withdrawn before they’re 30 without any deferral income taxes and after that, whatever amount is left in the account must be distributed to the beneficiary. Visit the IRS website for more information.
4. Financial Aid
I recommend you do your research on what financial aid is available for your child, as there are thousands of financial aid programs available. They fall into three general categories:
Reaching out to your child’s school and setting up a meeting with their financial aid office to see what financial aid you all can qualify for will be extremely helpful if this is the route you decide to go down.
5. Tax Credits
The American Opportunity Tax Credit (AOTC) is an annual maximum credit of $2500 per child per year designated for qualified education expenses for the first four years of higher education. It is available to both taxpayers and their dependents.
Your income cannot exceed a certain amount in order to qualify and you must make sure you are qualified before claiming the credit. You can check the IRS website for more information.
6. Cash Value Life Insurance
Presuming you have an insurable need, you might consider a non-traditional approach using cash value life insurance. Cash value life policies not only allow generous premium amounts, but also offer a tax-deferred growth option. You’ll be able to grow a tax-deferred accumulation in your policy’s cash value and tax-free income that you can then use to pay for your child’s higher education expenses. If you decide to use the cash to fund college, or something of the sorts, that means your life insurance benefit will decrease.
Kind Regards,
Mark Stratton, LUTCF®, CFP®, ChSNC®
Mark Stratton, Registered Representative offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, a Licensed Insurance Agency, 972-387-2929. Financial adviser offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser. TSG Financial Strategies LLC is not owned or operated by NYLIFE Securities LLC or its affiliates. AR Insurance License # 7487012.
