Saving for college
Saving for a child’s future college expenses may be one of your top financial goals, but planning can be a challenge. These resources can help.
Assess your needs
- First, start by answering some basic questions:
- How many children do you have or plan to have?
- How many years before they start college?
- What are your preferences for schools: Public or private? In- or out-of-state? Is there a specific school you have in mind?
- Will your child attend college for more than four years? What about grad school?
Determine what percentage of college costs you are willing to pay
- Grandparents, relatives and friends can be a source of funds for college: Ask them to contribute to your college savings plan on holidays, birthdays and special occasions instead of giving a traditional gift. You can even get your children involved in saving by contributing a portion of their allowance or job earnings toward your goal. Every dollar you put aside now is one less that he or she has to find later.
- Once college is a few years away, it’s time to look into grants, scholarships, loans and other types of financial aid and assistance. When it comes to borrowing for school, keep these guidelines in mind:
- Borrow only if you must and as little as you can.
- Exhaust all federal loan options before you resort to private loans, which often carry much higher rates.
- Investigate repayment options thoroughly before signing any papers.
- Work with a financial professional if the amount you’re borrowing is substantial (including future loans).
Understand what the costs will be when your child goes to school
- Next, do some research on the projected costs for college based on your goals.
- Then you’re ready to establish a realistic savings goal so you can decide on the percentage of the costs you want to pay and track your progress.
Consider college savings plans
- Section 529 plans: In general, these plans offer potential tax benefits that make them more attractive than conventional savings and investment options. There are two types of 529 plans: prepaid tuition plans and college savings plans. The savings plan version is more popular and offers account holders a great deal of flexibility and potential tax benefits. Learn more about 529 college savings plans from Merrill Edge®.
- Coverdell Education Savings Accounts (ESAs): These accounts allow you to earn and withdraw money free of federal (and possibly state) income tax to pay for qualified education expenses.1 Learn more about Coverdell ESAs from Merrill Edge®.
- Find out more about Merrill Edge investment products.
- To be eligible for the favorable tax treatment afforded to any earnings portion of withdrawals from Coverdell ESAs, withdrawals must be utilized for “qualified higher education expenses or qualified elementary and secondary education expenses,” as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax, as well as state and local income taxes.
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