Student loan debt and college costs are some of the hot topics in 2015. As student loan debt starts soaring out of control, bearing such college costs can indeed be tiresome and intimidating. More so if you’re a parent of a high school student who is about to prepare himself for a college degree, your concern must be immensely personal. Nowadays, college students graduate not only with a degree but also with an average of $25,250 in debt which is almost close to buying a car or arranging a down payment for a new home. Even though you may feel that borrowing is something inevitable for you, you should also explore some other options that can help you pay for college.
Coverdells, Roth IRAs and 529 college savings plans come with different tax benefits for all college savers. While private scholarships and grants are resources for free money, they can’t be achieved by every student who wished to. Even if you think that there are ways in which you can pay for college right now, you might not be able to take resort to those options as you’re not sure about them. If that is the case with you, this article rounds up the best payment strategies that students and parents may adopt in order to smartly pay off their college costs.
- 529 college savings plan: This college savings plan is sponsored by 50 states and the District of Columbia. The famous plan known as the 529 college savings plan allows you to grow tax-free dollars as the earnings or the savings usually escape federal tax entirely only if the withdrawals that you make are used for college expenses like tuition fees, room and board fees. 2/3rds of states usually give their residents a tax break for contributions towards this plan. You are even allowed to save money in the 529 college savings plan of other states. Their appeal lies in the easy accessibility and also their tax benefits.
- Prepaid tuition savings plan: Are you someone who’s planning to send your kid to a school within your state? If answered yes, you should soon sign up with a prepaid tuition plan. Majority of these plans are available only to the state residents and they allow you to lock in tuition in some specific colleges years in advance of the actual time. The tax perks that they offer are similar to that of 529 college savings plans and here too you will have to pay the same penalties and tax if you don’t use the money for college-related expenses.
- Coverdells: The Coverdell college savings account is similar to the 529s in the way that the money within the account grow tax-deferred and you can easily escape Uncle Sam if you use the money only for the qualified expenses. However, one thing that needs to be noted is that this account includes expenses at private elementary schools and also high schools. In case you make the mistake of withdrawing the money for some non-qualified expenses, you will be penalized with a tax penalty of 10% on your earnings. Setting up a Coverdell account can be done through a brokerage firm.
- Custodial accounts: With custodial accounts, there are no limits on contributions as it is your kid who will control your funds. UGMAs or Uniform Gifts to Minors Act are a kind of custodial account and it allows you to put cash or other assets in a trust kept for a minor child and you will be the trustee who will manage the account as the child reaches 18 or 21 years of age. As the junior reaches 18 to 21 years of age, he can use the money in any way he wants, may be for a trip to the UK or for buying a new home or for tuition expenses.
- Roth IRAs: A Roth IRA is a flexible account that can both fund your retirement and also the college education of your kid. But this can happen in the right manner only when you start early enough. The money that you save in this account grows tax-free and all kinds of tax on withdrawals can be smartly avoided only if you don’t surpass your contributions. If you use the money for educational expenses, you can even avoid a 10% penalty due to withdrawing early. Withdrawals from this account will cause a dent to your investment nest egg.
Student loan debt can’t be repaid with the help of even the best debt consolidation loans. Hence, as we see the college costs soaring out of control, it is better to be safe than sorry. Take into account the above mentioned accounts for saving money for meeting all educational expenses. This way you can avoid falling into the student loan debt disaster.