Saving for college before the first day of preschool
According to U.S. News & World Report, the average tuition and fees at private universities have increased 168% in the last 20 years. Since 1998, out-of-state tuition and fees have also increased by 200% at public universities, and in-state, public university college tuition and fees have increased a whopping 243%. Saving for college at a private university means saving $174,248 for a four-year, undergraduate degree. If tuition rises at the same rate, today’s preschoolers need to start saving for college at a rate that yields them more than $350,000 by the age of 18.
Saving for college with a Coverdell Education Savings Account
A Coverdell Education Savings Account (also known as a Coverdell ESA) is a custodial account for the purposes of saving for college (or any K-12 expenses). A Coverdell ESA, formerly known as an Education IRA until 2002, offers tax-free investment growth (and tax-free withdrawals for qualifying education expenses). Like a 529 plan, the Coverdell Education Savings Account can be used for tuition; unlike a 529 plan, however, the Coverdell ESA can also be used for books, supplies, equipment, academic tutoring, and other qualifying education expenses.
A Coverdell ESA, like its Education IRA predecessor, does have an annual contribution limit of $2,000 per student per calendar year. Given the rising costs of college, a Coverdell ESA can obviously not be the only part of your education savings plan. Instead, a Coverdell ESA should be treated like any long-term investment strategy—as a lower risk investment option. For example, at the Cornerstone Fund, a fixed-income term note can be used as part of your education savings plan (and overall investment portfolio for education) and marked as a Coverdell ESA. Other elements of your education savings plan can then be comprised of additional tax advantage programs like a 529 plan.
The limits to the Coverdell Education Savings Account (Coverdell ESA)
Besides its $2,000 annual contribution limits , the Coverdell ESA has a few other limits that any investor needs to know about, including a limit on contributions based on your adjusted gross income. As a custodian, if your income is $110,000 or more, you are not eligible to use a Coverdell ESA. T hat doesn’t mean that another qualifying investor (like a grandparent or other relative) couldn’t set-up a Coverdell ESA for the child. Keep in mind, however, that the annual contribution can only be $2,000 per child (in total, across all ESA accounts).
An education savings plan that reduces long-term student debt
Without an effective college savings plan, the student becomes a part of the student loan debt crisis. According to Forbes, current student loan debt in the U.S. totals more than $1.5 trillion. For example, borrowers in the Class of 2017 carry, on average, $28,650 in student debt. In Connecticut, that average student loan debt is $38,510. With an education savings plan that utilizes both 529 plans and a Coverdell Education Savings Account, a child can reasonably afford a secondary education after high school.