The cost of college isn’t getting any cheaper, so whether you’re a parent or prospective student, you may be wondering just how you’re going to cover tuition. There are many ways to pay for college, but they fall into three basic categories: savings, scholarships, grants and work study, and loans.
When it comes to paying for college, it’s best to start saving early. If you’re the parent of a young child, you might consider a 529 savings plan, a Coverdell or a custodial account as a savings vehicle.
529 Savings Plans – These tax-advantaged accounts, sponsored by all 50 states and the District of Columbia, let you grow your earnings tax-free. You’ll also pay no penalty on withdrawals used for qualifying college expenses. In addition, many states give their residents an additional tax break just for contributing to a 529.
Coverdell education savings accounts – Like the money in 529s, earnings in Coverdells are not taxed, and you pay no tax on withdrawals if they are used for qualifying education expenses. Although the contribution limits are strict ($2,000 per year per child, among other restrictions), the funds in Coverdells can be used to pay for primary and secondary schooling.
Custodial Accounts – Known as UTMAs or UGMAs, custodial accounts let you place an unlimited amount of money in trust for your child (although you should consider capping contributions at $13,000 to avoid the gift tax). When your child turns 18 (or 21, depending on your state’s laws), he or she gains legal control of the account and can use it to fund college tuition or other expenses.
Scholarships, Grants and Work Study – In addition to savings, scholarships, grants and work study programs are another way to cover college tuition and other expenses. studentaid.ed.gov and fafsa.gov have a wealth of information on these options.
When savings and scholarships, grants and work study aren’t enough, loans can make up the difference. There are two types of loans: federal loans and private loans. Federal loans typically have lower interest rates and more flexible repayment options, but you are limited in the amount you can borrow. Private student loans, on the other hand, offer much higher borrowing limits. Some loans, such as the one offered by WSFS, offer a rate discount when you sign up automatic payments with a qualifying checking account, as well as discounts for good grades and good credit.