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Best ways to save for your kid’s college

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Best ways to save for your kid’s college

Student debt is at crisis levels lately. Whether you know this first hand as a result of paying off your own student loans or youve just seen the many news stories on the topic, the fact remains that student loan debt continues to go up every year. The average college senior graduated with more than $35,000 in debt, a record high. No parent wants to see their child start out adulthood burdened by huge debts. Heres how you can start saving money now for your childs college education.

529 College Plans

If you live in one of the 30 states that allow 529 college plans, you should definitely consider investing in one. Also known as a Qualified Tuition Plan, a 529 plan is an investment of after-tax funds into an account that can be withdrawn tax-free for college-related expenses. If your child doesnt end up going to college, you would have to pay fees and penalties for withdrawing the funds, although the money can be transferred to another beneficiary. Because the money saved in a 529 plan is your asset rather than your childs, it will have less impact on your childs ability to get financial aid.

Prepaid College Tuition Plans

College tuition does not get cheaper as time goes on. In fact, college tuition costs have risen much faster than inflation in recent years. Prepaid college tuition plans are an option in a dozen states that allow you to save for part of your childs education now, which locks in tuition at todays rates. For example, if you save half the money for a years tuition at todays rates, your investment will still pay for half of a years tuition when your child attends college, regardless of what tuition costs in actual dollars at that time. Like 529 plans, prepaid tuition plans are generally exempt from federal taxes.

Coverdell Education Savings Accounts

Coverdell ESAs are very similar to 529 plans in that they have some tax advantages and are viewed as your asset rather than your childs. Coverdell plans are also eligible for use on any educational expenses, including private school tuition at the K-12 level. However, you can only contribute $2,000 per year per child, and eligibility phases out as your income exceeds certain levels (currently $95,000 for singles or $190,000 for married couples.) You may also face tax penalties if your child doesnt use the money by age 30.

Roth IRA

The Roth Individual Retirement Account, more commonly known as a Roth IRA, is a retirement savings account that offers tax advantages. Many people choose to use a Roth IRA to fund their childs education because the plans allow you to take out money tax-free and without penalties for qualified educational expenses after five years. The advantage of using a Roth IRA for funding education is that you still have the money saved in your own retirement account if your child chooses not to go to college. However, you can only contribute $5,500 per year ($6,500 after age 50) and your income has to meet certain limits (singles can earn up to $129,000; $191,000 per year for married couples.)