The price of a good education is more expensive than ever. Tuition costs for college are sky high, creating a heavy burden for students who aren't lucky enough to receive a full scholarship. Despite the high cost, a good education is still the best way to put a young person on the path towards a successfully future, making an expensive college education a necessary evil. Fortunately, there is a lot that parents and grandparents can do to help their children and grandchildren pay for their college education. Here is a look at some of the best ways to save money for college.
A 529 Plan
One of the most common ways of saving money for college is with a 529 plan. If you are certain that your child or grandchild is going to attend college, this can be a great way to save money, as all withdrawals for educational purposes are tax-free. However, there is a penalty if the student doesn't attend college and the money is used for something other than education.
Most of the time, a 529 plan comes with investment options, allowing your money to grow over time, which is particularly beneficial since you don't have to pay taxes on it when you withdraw it to pay for education. It's also important to keep in mind that contributions to a 529 plan are considered gifts, and an annual contribution of over $14,000 needs to be reported to the government; even if it's unlikely you'll have to pay a gift tax.
However, grandparents need to be careful about contributing too much to a 529 plan without having money saved for unexpected health issues that could arise. A gift given in the last five years could disqualify an elderly person from Medicaid. Attorney Joe Volin tells us: "Before making large gifts, a grandparent should make sure they have a plan in place to take care of themselves if a healthcare disaster strikes."
UTMA and UGMA Accounts
These types of accounts are akin to setting up a trust fund for a child or grandchild that can be used on education. Any asset you have can be put into one of these accounts and used towards college tuition when the time comes. If you have a large amount of cash, stocks, or annuities that you don't need in the short term, putting them in a UTMA or UGMA can go a long way towards paying for college tuition down the line. The downside is that if you have too much in one of these accounts, your child or grandchild may not receive much financial aid from the school.
Savings bonds are definitely a long-term strategy, as they can take a long time to pay off. However, if Series I or Series EE bonds are used for education, they are not subject to federal income tax, which is a nice perk. If parents and grandparents can invest in savings bonds when their child is young, they'll come in handy when it's time to pay for college.
Encouraging a teenager to get a summer job can make a meaningful difference when it comes to covering college expenses. A hard-working teen can make a few thousand dollars over the course of the summer without it interfering with their studies, and when it comes to paying for college, every little bit saved up can help.