How To Save for College
We have grouped savings options into four categories:
Educational Savings, General Savings, Specialty Savings and Financial Aid.
Educational Savings Options
A 529 Plan is a tax-advantaged education savings plan named after Section 529 of the Internal Revenue Service (IRS) Code. These plans are administered by state agencies or other organizations and are designed to help families save for future college costs.
Texas offers a prepaid plan and a savings plan, both are managed by OFI Private Investments Inc., a subsidiary of OppenheimerFunds, Inc.
Prepaid Plan: Texas Tuition Promise Fund allows savers to purchase Tuition Units today that will pay for future tuition and required fees for any two or four year public college or university in Texas. A Tuition Unit will cover the cost of a fixed amount of undergraduate tuition and required fees. Currently, 100 Tuition Units will usually cover one academic year or 30 semester hours. For more details, visit http://www.texastuitionpromisefund.com/ or call 1-800-445-4723 option 5. Note that there is a three year holding period obefore any of the prepaid amount can be used.
Savings Plan: Texas College Savings Plan allows savers to select investment options and the money can be withdrawn tax-free for qualified higher education expenses. For more details, visit https://www.texascollegesavings.com/OFI529/ or call 1-800-445-4723 option 3. You can enroll through the online application, download an application from their website, or have an application mailed to you.
For account holders of both the Texas Tuition Promise Fund and the Texas College Savings Plan there are potential scholarship funds through the Texas Match the Promise Foundation. For more details, visit https://comptroller.texas.gov/programs/education/match/
If you decide that you want to open a 529 account, please review our resources and talk to a licensed financial advisor to help you decide which plan works best for you.
529 Plans in Other States: Almost every state offers at least one 529 program. Prepaid 529 programs are available to state residents only, but college savings plans are open to residents of any state. Details differ by state, so visit http://www.savingforcollege.com/college_savings_201/ or http://www.collegesavings.org/index.aspx to compare 529 programs.
Coverdell Educational Savings Account (ESA)
A Coverdell Educational Savings Account (ESA) is a custodial account or trust set up to save for the child’s future education costs at any college that is eligible to participate in a student aid program administered by the U.S. Department of Education. The Coverdell ESA can also be used to pay for qualified educational expenses at eligible elementary and secondary schools. Qualified education expenses for a Coverdell CSA are tuition and fees, books, supplies, and room and board. The Coverdell account is set up through a variety of providers. See a sample list here: http://www.savingforcollege.com/coverdell_esa_providers/.
EE Savings Bonds and I Savings Bonds
U.S. Savings Bonds are a government-issued, low-risk way to save for college that guarantees that you will not receive less than you invest. There are two different types of savings bonds, Series EE Savings Bonds and I Savings Bonds, that can pay for qualified educational expenses and you will not be taxed on the interest earned when you redeem the bond. Series EE and I bonds can be used to cover qualified educational expenses, including tuition, fees and expenses for any class required for a degree or certification program. Each bond has different features and advantages and can be purchased in denominations from $50 to $10,000. For more information, read IRS Publication 970. I Savings Bonds can be purchased with your tax refund when you file your taxes. Bonds can also be purchased here: http://www.treasurydirect.gov/indiv/indiv.htm.
General Savings Options
A Savings Account is a safe place to keep money with low interest earned on the savings. The amount needed to open and maintain a savings account varies, depending on the financial institution. Contact the financial institution of your choice for more information.
Money Market Deposit and Money Market Accounts
A Money Market Deposit Account or Money Market Account usually requires a higher amount to open than a Savings Account and offers higher interest, but likely has additional restrictions, including minimum balances and limits on the number of transactions. Contact the financial institution of your choice for more information.
Please note that a Money Market Account is different than a Money Market Fund. A Money Market Fund is a type of mutual fund usually offered by brokerage or investment firms. A Money Market Fund will have different amounts of risks, charges, and expenses than a Money Market Account. Talk to a brokerage or investment firm for information on a money market fund product.
Certificate of Deposit (CD)
A Certificate of Deposit requires the saver to keep a certain amount of money in the bank for a fixed period of time, and there is a penalty for early withdrawal. After the time period ends, the saver will receive the interest and the initial deposit back. The amount of money required to open a CD and the amount of time the money must remain in the account varies by financial institution. Contact the financial institution of your choice for more information.
Specialty Savings Options
Children’s Savings Accounts (CSAs)
A growing list of communities have developed Children’s Savings Accounts (CSAs). CSAs are special accounts opened for children when they are born or at a young age, depending on the program, that grows as the child grows. Some CSAs are designed to save for a college education. Keep an eye out for CSA programs offered in your area. For examples, read about San Francisco’s Kindergarten to College program http://www.k2csf.org/ or visit https://prosperitynow.org/map/childrens-savings.
Individual Retirement Accounts (IRAs)
Individual Retirement Accounts (IRAs), such as the Traditional IRA or a Roth IRA, can be used to pay for qualified higher education costs. Generally, if you withdraw money from an IRA before age 59 ½ , there is a 10% additional tax to pay. However, there is an Education Exception to the additional 10% tax if a qualified education expense is paid in the year the funds are withdrawn. There are restrictions on who is eligible, the allowed expenses, and which colleges qualify. For more details, please read http://www.irs.gov/publications/p970/ch09.html.
Financial Aid: Free Application for Federal Student Aid (FAFSA)
To apply for financial aid, you must complete the Free Application for Federal Student Aid (FAFSA) Form. Some states and colleges will also use your FAFSA to determine eligibility for private and state aid. For the deadlines, visit http://www.fafsa.ed.gov/deadlines.htm.