There are a number of options for investments to pay for college.
As the cost of a college education increases each year, parents and others hoping to pay for a youngster's college education need to develop a plan and choose the best investment for their specific situation. Though the potential investment plans for a college education are almost endless, there are a number of solid investment choices that offer an ideal balance between risk and reward.
529 Savings Plans
Individual states sponsor 529 savings plans. Investors do not have to use the plan from their own state, but many states provide state tax deductions for in-state investors. These plans allow investors to invest up to $200,000 towards the costs of college. Each state has its own rules for their plans, but the money grows and spends tax free for college education purposes. These plans invest in stocks, bonds and other securities, and can potentially provide large returns over time. Investors choose invest the money in the account, similar to a 401(k) plan. Additionally, by keeping the parent's name on the 529 account, the money saved will reduce the student's scholarship or grant eligibility less than if it was in the student's name.
Prepaid Tuition Plans
Prepaid tuition plans are not an investment, but rather a way to pay for college now at a lower cost than in the future. For example, a parent or grandparent can pay for an infant child's future education at today's prices. Even better, many of these plans offer a discount over the current cost of tuition. Plans exist for various state's public colleges and universities as well as private schools. Before buying a prepaid tuition plan, you should carefully check the plan's rules to determine what will happen if the child does not go to college or attends a college outside of the plan.
Coverdell Education Savings Accounts
The Coverdell education savings account is one of the most versatile education investments. Investors can use money from a Coverdell account for a variety of educational expenses, including tuition for schooling from kindergarten to college as well as needed items such as textbooks and computers. Money in a Coverdell account grows tax free, and withdrawals are also tax free as long as they are used for educational expenses. Investors can only place up to $2,000 per year into these accounts, and the money counts as an asset for the child when applying for financial aid.
Savings Bonds
While savings bonds do not pay a large rate of return, they do offer some useful advantages for college savings. One advantage is that savings bonds pay a guaranteed rate of return, which reduces risk. Additionally, the money from a savings bond spent for tuition is not subject to taxation, except for those in the highest tax brackets. Another advantage is that savings bonds are not specifically for educational purposes, so the parent or other holder of the bond can use the money for other purposes without significant penalty.
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