Saving for College

As someone who values financial freedom for yourself and your family and seeks a better life for all, you understand the importance of a college education for your children. And you know that, next to buying a home, a college education is the largest expenditure most parents will ever make. According to the College Board, the average 2010-2011 tuition increase was 4.5% at private colleges and 7.9% at public universities. The ten-year historical rate of increase is about 6%. That’s substantially higher than the general inflation rate and higher than the average increase in personal income as well.

It’s likely those numbers will only continue to rise.

The Importance of Saving Early

The more money you save now, the less money your child will need to borrow later. By investing even a small amount on a regular basis, you have the potential to accumulate a significant amount in your child's college fund.

The following table illustrates how your monthly investment could grow over time (assuming an 8 percent after-tax):

Monthly Investment 5 Years 10 Years 15 Years 20 Years
$100 $7,348 $18,295 $34,604 $58,902
$300 $13,043 $54,884 $103,811 $176,706
$500 $36,738 $91,473 $173,019 $294,510

Note: This example is for illustrative purposes only and does not represent the return of any investment. There is no guarantee that your investment will realize a return, and there is a risk that you could lose your investment entirely.

Saving for College—What are Your Choices?

When saving for your child's college education, one size does not fit all. Should you choose a Coverdell Education Savings Account or a UGMA/UTMA custodial account in your child's name? Or would you prefer to simply put money into an account in your own name? Ideally, you will want to choose a savings vehicle that offers the best mix of tax advantages, financial aid benefits and flexibility while meeting your overall needs.

Coverdell Education Savings Account

A Coverdell Education Savings Account (formerly Education IRA) is a tax-advantaged educational savings account that you can establish for any child under age 18. Withdrawals can be used to pay for qualified college, secondary or even elementary school expenses. Contributors must meet certain income eligibility requirements.

Key benefits:

  • Withdrawals for qualified expenses are generally tax-free
  • Tax-free growth until funds are withdrawn
  • Flexibility of education expenditures
  • Ability to change the designated beneficiary to another qualified family member
  • Continue to manage the account even after your child reaches majority age

Potential disadvantage:

  • Income restrictions exist for depositors into a Coverdell Account

UGMA / UTMA Custodial Accounts

The UGMA/UTMA custodial account can be used to save for college or anything else that benefits your child. A custodian (usually a parent) manages the account, and its assets are considered an irrevocable gift to the child.

Key benefits:

  • Make a financial gift to a child, whether your own, a relative's or a friend's
  • As the custodian, you control how the account is managed on behalf of the child until the child reaches the age of majority
  • High yearly gift limits
  • Opportunity for tax savings

Potential disadvantage:

  • Contributions to an UGMA/UTMA are considered an irrevocable gift to a child. That means you may not take the contribution back nor can you transfer money to another child

Best of all: withdrawals can be used to pay for anything that benefits the child.

Note: Azzad Asset Management does not provide tax or legal advice.