College Savings Explainer


So, you’ve done the math. You know how much you’re probably going to have to spend to cover college costs, and you even have a savings goal for how much you’ll need to cover your portion of the costs.

(Haven’t done the math? Have no fear, just use our college savings calculator.)

But how are you going to get there? There are many ways to invest to set aside money for education. Do you and your parents want to learn more about college saving strategies? One useful resource is Smart Saving for College: Better Buy Degrees.


It seems pretty simple. You earn some money, and based on your budget, you set aside a portion of it to spend on school in a couple of years. If you put it into a high-yield account, you might earn a few percent in interest each month too.

But college is expensive. And it's getting more so. If you're a sophomore or a junior, why not try something a little more sophisticated with your savings? Even if you only have a few years to play with, compound interest can give your fund a big boost. Click through for information on some popular ways to save for college.


The 529 plan is an often touted way for families to save for college, and each state has it's own version of one. But you should know that the tax rules surrounding them, the fees involved and the restrictions on them are different in each state as well, so checking the rules in your state is a must before choosing this type of investment.

Keep in mind that there are two different kinds of plans. One is known as pre-paid tuition, which allows you to contribute money to pay today's tuition for tomorrow's classes at an in-state school only. The other plan, known as a college savings plans, allows for more flexibility in where you attend school and what you can spend the money on.


The benefit of a 529, of course, is that you can set aside money tax free, and when you take the money out to pay for college expenses, you don't pay any taxes either.

You can compare the two different kinds of 529 plans here.


Once known as Education IRAs, an ESA is pretty similar to an IRA, the type of investment many adults use to built a retirement account.

They are available in every state, earnings are tax-deferred and money taken out for school is tax free. There are limits to how much can be contributed each year, income restrictions and each individual fund will have it's own fees and service charges to consider before choosing a fund to invest your money in, so do your research.


Did you know if you redeem all the savings bonds your grandmother gave you for every birthday and use the money for your education, the proceeds can be tax free?

The rules on getting a tax break for this method of saving can be a bit complicated, and there are income requirements, so get the facts before planning on cashing in savings bonds to pay for school.


Did you know the 2009 Economic Stimulus package brought back an important tax credit that can save you money while you're in school?

When you file your tax returns when you do start paying for higher education, you're entitled to up to $2,500 in tax credits for what you paid for school.

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