Your College Saving Options

If your family is not already putting aside money to pay for your college education, it’s not too late to get started with special savings accounts for education costs.

These accounts allow your money to grow in two ways. First, they offer interest — a profit you make from the money you’ve invested in the account. Second, the interest you make from these accounts is not taxed, unlike that in a regular interest-earning savings account. Here are the details about two programs designed to help you and your family save money for college.

529 Plans

There are two types of tax-free qualified tuition programs, also called 529 savings plans. Here is a brief description of them.

College Savings Plan

With these state-managed plans, you usually have some choice about how a state invests your money, and you earn interest on the investment. You can withdraw money from these plans to pay for any type of expense at any college.

Prepaid College Tuition Plans

States or higher education institutions can manage these plans. They allow your family to prepay your college tuition and lock in today’s prices, no matter how much the cost of going to college increases.

Coverdell Education Savings Account (ESA)

Coverdell Education Savings Accounts (ESAs) — formerly called Education IRAs — offer another good way to save money for education expenses. Here are some details about these accounts:

  • They can be opened as soon as you are born.
  • You can add up to $2,000 each year (2011 and 2012 limits).
  • Each ESA is for one student only, but a family can have more than one ESA.
  • Money in ESAs earns interest tax-free.
  • This money can be used to pay for elementary, secondary or college education costs.

Learn more about ESAs from IRS Publication 970, Tax Benefits for Education.

This article is intended for informational purposes and is not intended as tax or financial advice.