How to Save for College Tuition

By eHow Education Editor

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There are several options available to save for college tuition. College tuition continues to grow at a rate higher than inflation. According to a report based on College Board's Annual Survey of Colleges, the average total cost of 1 year at 4-year private colleges and universities in 2007 was more than $30,000. It's very important to plan for your college education years in advance and put the appropriate funding vehicles in place.

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Instructions

Difficulty: Easy

Step1

Estimate the approximate amount you will need to save for college education. Base your estimate on current reported expenses and factor in a 7 percent annual increase in overall cost.

Step2

Initiate a 529 college savings program. Understand the difference between the 529 prepaid tuition plan and the college savings plan. The former is essentially a vehicle to pay for tomorrow's education at today's prices. If you buy a semester's worth of tuition today, it will pay for a semester's worth of tuition no matter when you use it. In a college savings plan, the account's earnings are dependent on the performance of the underlying investment portfolio. The funds are tax deferred and are exempt from federal income tax when withdrawn to pay for higher education for the beneficiary.

Step3

Purchase U.S. Savings Bonds, either at a credit union or bank or online at TreasuryDirect (see Resources below). These are very safe investment instruments. However, their rate of return is fairly low. Interest accrued from Series EE and Series I Savings Bonds are exempt from state income tax. Some part of it could also be free from federal income tax when used to pay for higher education expenses.

Step4

Open a Coverdell Education Savings Account at your bank, if your gross income is less than $110,000. This used to be known as an Education IRA. The yearly limit you can contribute to this account is $2,000. The account may be used for college education, though it could also be used to pay for K through 12 school education expenses.

Step5

Solicit gifts from friends and family members who can afford to do so. When things are tight and you haven't been able to save enough, those who can help can realize some tax benefits. When gift checks are written directly to educational institutions, they carry no income tax or gift tax implications.

Step6

Create a custodial account under the Uniform Transfer to Minors Act (UTMA). Under this law, one could contribute up to $12,000 per year to an account which transfers to the control of the child at the age of 21. It has limited tax benefits, but it can be used for any purpose, including paying for college tuition.