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Saving for College When Your Budget is Tight

By: Celia Webb

You'd like your child to go to college, but you don't have heaps of cash lying about and your budget is tight. Is there anything you can do? You do have options, but before we explore them, remember this - while your child can get scholarships, grants, and take out loans to finance college, there is no help for retirement. So before you put a single penny away for your child's education, fully fund any retirement options you have. Does your company offer a 401k (especially if it offers to match your contribution)? Are you contributing to a Roth IRA? How about a traditional IRA? Use these investment vehicles for their tax advantages. Are you thinking you will survive on Social Security? Think again. Social Security payments are usually not enough to cover the rent in most places in the U.S. let alone food, utilities, transportation, medicine and other medical expenses.

Once your retirement savings plan is in place, then set up the college savings plan for your child. There are four tax-advantaged ways of saving for college. You can start a 529 plan, create a Uniform Gift to Minors Account (UGMA/UTMA), begin a Coverdell ESA (Education Savings Account), or purchase US Savings Bonds. Current rates on Series EE bonds are less than 1% and savings bonds do not offer the flexibility and options you can get with the other savings vehicles so use these after you have exhausted the other options.

529 Plans: A 529 Plan is an education savings plan operated by a state or educational institution to help families save for college. It is named after the 529 Section of the Internal Revenue Code which established these savings plans in 1996. These plans are very flexible and can be started with as little as $25. Some of the benefits of these savings plans include:

To compare 529 plans and find one that works for you, search on the terms "College Savings Plan Network" or "compare 529 plans".

UGMA/UTMA: Uniform Gift to Minor Accounts/Uniform Transfer to Minor Accounts are considered irrevocable gifts to the designated child. The money can be used in whatever way the child sees fit. The earning and gains are taxed to the minor and gifts are limited to $13,000 per year. Use this method after you have exhausted what you can do with a 529 plan.

Coverdell ESA: The interesting feature of the Coverdell Education Savings Account was that the money could be used to fund K-12 education as well as college. However, 2012 is the last year for that unless Congress acts. If Congress does not act, the most you can add to this fund is $500 per year and it can only be used for college. and the amount which can be contributed will drop back to $500. Contributions also count toward the $13,000 limit for gift tax consideration. Frankly, this is only worth considering if you have fully contributed to the 529 plan (three hundred or so thousand dollars depending on the plan) and you absolutely want to ensure the money is spent on education only.

You can help your child with college expenses by setting aside some money each month. The younger they are when you start, the more money there will be when your child heads off to the new adventure of college. Start saving today.

For more ideas on saving money, check out our book: