Give the gift of education with college savings plans
You or any other family member can give the gift of education by opening a 529 or other college savings plan account specifically for future higher education expenses.
Are you looking for an impactful gift to give to the children in your life for a birthday, holiday or other special occasion? It's never too early to start saving money for your kid's college education, or you can make contributions for your nieces, nephews or grandchildren. Long after toys are broken or outgrown, a college savings plan may still be appreciated because you will have started a way to save for college. You will have shown your faith in their lives and future and give them a better chance to start out debt-free in adulthood.
529 plans are a good gift option
These "qualified tuition programs" allow you to save for future educational costs under Section 529(b) of the Internal Revenue Code. The 529 college savings plan allows you or any other family member to open an account with a low contribution amount specifically for future higher education expenses. Residency requirements may apply. Your investment is tax-deferred and distributions from the fund are exempt from federal income tax if used for qualified education expenses.
In addition to traditional 4-year colleges, these funds may be used for community college, trade school or vocational schools. If the designated child doesn't attend higher education, the funds can be used for other family members as IRS rules allow. If you find no one will use the funds, even a future grandchild, the funds may be redeemed with taxes and a 10% penalty applied to the earnings.
Coverdell Education Savings Account (ESA) is another option
A Coverdell ESA is a trust that lets you contribute funds earmarked for future educational costs (elementary and secondary education through college and graduate school), up to $2,000 per year, per child. Contributions can begin at birth and continue until a child turns 18 years of age. Coverdell ESA accounts are exempted from federal income tax and withdrawals are tax-free if used for qualified education expenses. In addition, the funds can be transferred to a sibling if your child doesn't need it.
Lastly, UGMA and UTMA accounts
Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts are designed to hold and protect assets for the benefit of a minor. With these two accounts, you can make monetary gifts without setting up a trust. Assets can be used for any reason at any time for the benefit of the named beneficiary and the minor gains control of the funds when they reach the age of trust termination (which is age 18 to 21, depending on state and account restrictions). Assets can be used for education expenses, but because assets are considered the property of the beneficiary, there may be a high impact on financial aid.
Tips for students to contribute to their higher education
Savings accounts - Students can open savings accounts when they’re young, saving monetary gifts or money earned from jobs. Parents and grandparents can make deposits to these accounts to help the student save for college.
Scholarships - This is free money — and never has to be paid back. Some websites offer thousands of scholarships. There are scholarships for all kinds of things — athletics, extracurricular activities, need-based, degree being sought, minority or ethnicity status and the list goes on. Students should consider applying for as many scholarships as possible.
Other options - Encourage students to take AP classes that will give them college credits while still in high school. Getting a job can be a good way to help save money. And consider student loans as a very last option to help avoid debt upon graduating.
Think about saving for your child's college with one of the options above and possibly pairing it with a toy or something else the child can unwrap if your budget allows.
