Other than 529 plans, there are other ways to save for college.
Coverdell Education Savings Account (CESA or ESA), for example, offer qualified withdrawals free of federal taxes. Features include:
- Flexible Beneficiary designation
- Can be applied to elementary, secondary and higher education expenses
- Money can be gifted to a child who can open their own account, bypassing income restrictions
- Investment flexibility
- Considered a parental asset for federal aid purposes if parent is the owner
Please keep in mind that parents and donors are required to either distribute the Coverdell ESA at age 30 or roll it over to another child. Thus, if there is still money in the account and the child either decides against going to college or does not need all the money, a parent may eventually have to transfer ownership of the account to the child.
Contributions are limited to $2,000 per Beneficiary per year and contributors must have income below a certain amount.
UGMA/UTMA Accounts are another alternative to 529 Plans. Benefits include:
- A portion of earnings taxable at student’s rate
- No limit on amount transferred to account
- Investment flexibility
- Unrestricted use of assets, provided it is for the benefit of the minor
Remember, the UGMA/UTMA Custodian loses all control of the funds when the minor reaches the age of majority. Depending on the state, that could be 18 or 21 years of age. And the custodian has limited control before the minor reaches the age of majority. The custodian cannot change the Beneficiary of an UGMA/UTMA account.
Consider Scholarships and Aid
There are many ways to close the gap between the cost of college and your ability to pay.
Educate yourself on the many ways to offset the cost of education. Consider the following:
- Scholarships: A wide variety of financial scholarships are available to many deserving students.
- Financial Aid: By completing a standardized Free Application for Federal Student Aid (FAFSA) application you can find out if you qualify for financial aid. You can also learn more about federal financial aid opportunities by visiting the Federal Student Aid Information Center (FSAIC) website.
- Assets in 529 plans and distributions from 529 plans receive favorable treatment in the federal financial aid eligibility formula when certain conditions are met.
- By Texas law, assets in the Texas Tuition Promise Fund may not be considered in determining eligibility for Texas state-funded student financial aid.
- School based financial aid does not have to follow the federal formula. 529 plan assets might have a bigger impact on school-based financial aid.
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