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Home > Preparing for College > Saving for College > Descriptions of Education Savings Options

 

Descriptions of Education Savings Options


 

A variety of savings and investment options can help you pay for higher education. As you consider the following, keep in mind that the more quickly you earn a return on your investment, the higher the level of risk. Know your risk tolerance so that you can feel comfortable with your decisions.

U.S. (Series EE) Savings Bonds

U.S. Savings Bonds are promises by the U.S. Treasury to repay the owner with interest when the bond is redeemed. Bonds can earn interest for as long as 30 years. Bonds purchased after May 2005 have a fixed interested rate. Paper bonds are sold at half the face value price; electronic bonds purchased directly from the U.S. Treasury Department are sold at face value. These bonds are exempt from state taxes depending on your income level when used to pay for tuition. Income limitations apply. Savings bonds are backed by the federal government. Learn more about the Education Savings Bond Program.

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U.S. Zero-Coupon Bonds

U.S. Zero-Coupon Bonds are sold at deep discount to face value and are available from the U.S. Treasury Department, some state and local governments and some corporations. The yield is determined by current interest rates and does not earn periodic interest payments. You receive a single, fixed cash payment at maturity. Bonds purchased from the U.S. Treasury are backed by the federal government.

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Life Insurance

A permanent life insurance policy with fixed annual premiums generally allows you to borrow against its cash value. Interest rates on such loans are usually reasonable, and many allow you to make payments on a flexible schedule. Your insurance premiums accumulate tax-deferred, and the cash value can be withdrawn or borrowed tax-free to pay for higher education. However, the amount of the outstanding loan decreases the death benefit. And, since life insurance is typically purchased as financial protection for your family should you die, borrowing against your policy will leave your family with less money in the event of your death.

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Coverdell Education Savings Account

A Coverdell Education Savings Account (ESA) is a trust or custodial account created or organized in the United States for the sole purpose of paying qualified elementary, secondary or postsecondary education expenses of the designated account beneficiary. Earnings on a Coverdell ESA grow tax-free until withdrawn to pay for qualified expenses. Total contributions for the beneficiary cannot be more than $2,000 each year. You can open a Coverdell ESA at financial service firms and institutions. Income limits apply. Learn more about the Coverdell ESA.

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Certificates of Deposit

Certificates of Deposit (CDs) are deposits issued by banks that guarantee payment of a fixed interest rate for a set period. The longer the term, the higher the interest rate. Early withdrawal can result in a financial penalty. The Federal Deposit Insurance Corporation (FDIC) insures amounts up to $250,000 through December 31, 2013 (decreases to $100,000 after this date).

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529 College Savings Plan

A qualified tuition program (QTP), 529 College Savings Plans allow you to contribute to an account established for paying a student's qualified higher education expenses. Qualified higher education expenses are tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible education institution. Qualified expenses include room and board for a beneficiary enrolled at least half time. The Plan amount can transferred to another QTP and changes in beneficiaries are allowed so long as the new beneficiary is a family member. Families who use a qualified tuition program to finance a student's higher education may claim either the American Opportunity Tax Credit or Lifetime Learning Tax Credit if they meet the income limitations. Families also can make contributions to a Coverdell ESA and a QTP in the same year for the same beneficiary. Learn more about the Minnesota College Savings Plan.

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Money Market Accounts

Money market accounts are savings accounts offered by banks that have a high minimum balance and have interest rates that are usually higher than regular savings accounts. The FDIC insures amounts up to $250,000 through December 31, 2013 (decreases to $100,000 after this date).

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Money Market Funds

Money market funds are a professionally managed pool of money that is invested in a wide variety of savings instruments. These funds have a fluctuating rate of return over a set period and typically have higher interest rates than money market accounts. Money market funds are not insured, but funds are usually invested in safe, short-term instruments that have high credit ratings.

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Mutual Funds

Mutual funds are professionally managed pools of stocks, bonds or a combination of both. They provide a wide diversification by investing in a variety of industries without the need to invest in each individually. This spreads out the amount of risk, but mutual funds are affected by stock market and economic swings.

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Common Stocks

Each share of stock represents part ownership and a claim to the company's assets and profits in proportion to the number of shares owned. It is a proven way to outpace inflation if investments are carefully selected and monitored. However, the stock market can be extremely volatile. Investing in a variety of industries can spread the risk and help your investments weather the ups and downs in the stock market.

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