How To Save for College
There are many opportunities available to start saving for your child’s college education. Below are some of the savings options available to Texas families. To simplify the savings options, they have been grouped into four categories:
- Educational Savings Options
- General Savings Options
- Specialty Savings Options
- Financial Aid: Free Application for Federal Student Aid Form (FAFSA)
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 both a prepaid plan (the Texas Tuition Promise Fund) and a savings plan (the Texas College Savings Plan). Both are managed by OFI Private Investments Inc., a subsidiary of OppenheimerFunds, Inc.
The Texas Tuition Promise Fund is a prepaid plan that allows individuals and families 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 information on the Texas Tuition Promise Fund or to enroll, visit http://www.texastuitionpromisefund.com/ or call 1-800-445-4723 option 5. Please note that there is a three year holding period on the account before any of the prepaid amount can be used.
The Texas College Savings Plan allows individuals and families to select from a variety of investment options and the money can be withdrawn with no federal tax when paying for a qualified higher education expense. For more information on the Texas College Savings Plan or to enroll, visit https://www.texascollegesavings.com/OFI529/ or call 1-800-445-4723 option 3. You can enroll in the Texas College Savings Plan through their online application, or download an application off their website, or you can have an application kit mailed to you.
For both the Texas Tuition Promise Fund and the Texas College Savings Plan account holders there are potential scholarship funds through the Texas Match the Promise Foundation. For more information on this opportunity, go to the website at https://comptroller.texas.gov/programs/education/match/
529 Plans in Other States: Almost every state in the United States offers at least one 529 program. The prepaid 529 programs are available to state residents only, but the college savings plans are open to residents of any state. The details of each plan differ by state, so visit websites like http://www.savingforcollege.com/college_savings_201/ or http://www.collegesavings.org/index.aspx to compare 529 programs by state or by features (ex. Fees, tax benefits, investment options, etc.).
If you decide that you want to open a 529 account, please review our resources at the end of this publication, or talk to a licensed financial advisor or other knowledgeable people to help you decide which plan works best for you.
Coverdell Educational Savings Account (ESA)
A Coverdell Educational Savings Account (ESA) is a custodial account or trust set up to save for the beneficiary’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 different providers. To see a sample list of providers, visit 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 money than you invest. There are two different types of savings bonds, Series EE Savings Bonds and I Savings Bonds, that permit qualified taxpayers to use the bond to pay for qualified educational expenses and then to exclude the interest paid (when redeeming the bond) from their gross income on the Federal Income Tax form. Series EE and I bonds can be used to cover qualified educational expenses, including but not limited to tuition and 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 on the Series EE and I Bonds, read IRS Publication 970. I Savings Bonds can be purchased with your IRS tax refund when you file your taxes. Paper bonds are no longer available. All bonds are purchased through the TreasuryDirect website at 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 depends on the requirements of each financial institution. Savings accounts can be managed online and usually have minimal to no fees and limits on the number of withdrawals per month. Contact the financial institution of your choice for more information on a savings account.
Money Market Deposit and Money Market Accounts
A Money Market Deposit Account or Money Market Account usually requires a higher amount to open the account than a Savings Account and offers higher interest, but usually has additional restrictions including minimum balances and limits on the number of transactions allowed over a specific period. Contact the financial institution of your choice for more information on a money market account.
*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. Saving in a Money Market Fund will have different amounts of risks, charges, and expenses than a Money Market Account. You will want to talk directly to a brokerage or investment firm if you are interested in 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 in which the money is inaccessible to the saver. There is a penalty for early withdrawal. A CD tends to have a higher interest rate than other savings products. After the fixed amount of time ends, the saver will receive the interest and the initial deposit back which can be used for paying college or other expenses. The amount of money required to open a CD and the amount of time the money must remain in the account will vary by financial institution. Contact the financial institution of your choice to receive more information about available certificates of deposit.
Specialty Savings Options
Children’s Savings Accounts (CSAs)
A growing list of cities and communities have developed a savings option called Children’s Savings Accounts (CSAs). CSAs are special accounts opened for children when they are newborn or at a young age, depending on the program, that grows as the child grows. In some cases, the CSAs are specified accounts to save for a college education. These accounts are growing in popularity and are expanding nationwide. Keep an eye out for CSA programs offered in your city or community. To get a better idea of what a Children’s Savings Account program is and how it works, read about San Francisco’s Kindergarten to College program http://www.k2csf.org/ or visit the Prosperity Now website https://prosperitynow.org/map/childrens-savings.
Individual Retirement Accounts (IRAs)
In some situations, individuals have used Individual Retirement Accounts (IRAs), such as the Traditional IRA or a Roth IRA, to save and pay for qualified higher education costs. If a distribution is withdrawn 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 during the year of the distribution. There are restrictions on who is eligible for this exception, the types of education expenses allowed, and which colleges the student can attend. The IRS provides more information about the Education Exemption in IRS Publication 970, which includes a way to determine how much of your distribution is not subject to the 10% tax. Read IRS Publication 970 (http://www.irs.gov/publications/p970/ch09.html for more information.
Financial Aid: Free Application for Federal Student Aid (FAFSA) Form
In order to apply for financial aid, you must complete the Free Application for Federal Student Aid (FAFSA) Form. It must be completed to access federal financial aid.Some states and colleges will also use your FAFSA form to determine eligibility for private and state aid. The financial aid office at the college your child chooses will determine the amount of financial aid your child is eligible to receive. To find out the deadline for completing the FAFSA form for your child, visit http://www.fafsa.ed.gov/deadlines.htm.