Creating a College Fund

College Fund

College funds can help provide you or your child with money to attend college. There are different kinds of funds, so it's important to understand the differences before you start one.

How To Create a College Fund

It's never too early or too late to start a college fund. Whether it's an attempt to provide for your child or yourself, a college fund can help to provide money for a college education.

The first step is to determine when the person the fund is for will be going to college. If the date is very soon, don't be surprised if you're not able to fully fund the education - but keep in mind that anything is better than nothing.

The second step is determining how much you want to have in the fund. This will vary depending on whether you're looking for a private or public education.

The third step is to figure out what type of fund you will start. It may help to discuss this with a financial planner as he or she will be able to give you a better idea of the return on investment you'll be able to get in each account.

The fourth step is to save! Make regular deposits into the account, and, if you can, give more at holidays and other special occasions. Depending on the account, you may be able to let others deposit money into the fund themselves. If not, you can always do it for them.

Different Types of Funds

There are three major kinds of college funds, each of which is outlined below.

Section 529 Plans

Section 529 Plans are based on tax codes. The rules used for these vary by state, so you will need to do further research in your state before you can tell if one is right for you. There are two types of 529 plans, college savings and pre-paid tuition.

  • College Savings Plans These are savings accounts that are normally tax-deferred. In most cases, they allow maximum contributions of $100,000 to $250,000. The money is held by the account holder, and he or she controls the assets, so there's no need to worry about Junior taking the money to buy a new car.
  • Pre-Paid Tuition Plans This is a chance to pre-pay college tuition. In some cases, the tuition may be paid all at once; in other cases, the payments are spread out, similar to a repayment of student loans, but paid in advance.

Coverdell Education Savings Accounts

These savings accounts were once called "Educational IRAs." A Coverdell Savings Account has limitations. Investors can add money to the account until the person the account is for is 18, and the money is only tax-free until the person is 30. The amount of money placed into the account has a limit, and the limit varies based on the maximum amount of earning the owner of the account may have ($190,000 when married and filing jointly to begin with; when the owner earns over $220,000, the account cannot have any more contributions).

Uniform Transfer or Gift to Minors

The Uniform Transfer to Minors Act and Uniform Gift to Minors Act allow a parent to set up a college fund in the child's name and put up to $11,000 a year per person, or $22,000 for a married couple, into it. Setting up the account may involve the help of a financial planner or tax attorney, however, as you will need to appoint a custodian and fill out extensive paperwork.

Other Sources of College Funding

  • Loans. If you're unable to start a college fund, you can instead rely on private loans. Many banks and other lending firms offer private education loans.
  • Investments. You may be able to fund a college education through investments. Talk to your financial planner.
  • Grants and Scholarships. Depending on your school, major, earnings, and personal data, you may be eligible for grants and scholarships. Most of these do not need to be paid back, unlike private and federal loans.
  • Federal Financial Aid. You may be eligible for subsidized or unsubsidized federal student aid. Fill out your FAFSA application to apply.

While college tuition may seem overwhelming, using a college fund may help take the sting out of the expenses.

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Creating a College Fund