There has been much media attention lately about the large amount of student loan debt. Planning ahead can help students and families reduce this debt load.

529 Plans

Contributions to 529 plans grow tax deferred, similar to retirement plans. Generally, contributions to 529 plans are limited to the amount of the annual federal gift tax exclusion ($14,000 for 2014). Withdrawals from the plans are not taxed at the federal level (and usually not taxed at the state level) as long as the funds are used for qualified education expenses.

There are two types of 529 plans: prepaid tuition plans and college savings plans.

Prepaid tuition plans allow a parent or grandparent to pay ahead for the student’s tuition at the current cost. Depending on the plan, the student may be limited in what colleges he/she can attend.

With a college savings plan, the parent or grandparent sets up an account and names the student as the beneficiary. Withdrawals can be used at any accredited college.

Most states have college savings plans that provide limited tax deductions for their residents. For example, the Nebraska college savings plan allows Nebraska residents to deduct contributions up to $10,000 for 2014, an increase from the prior deduction amount of $5,000.

If funds remain in the account after the student/beneficiary has finished college, or the student decides not to go to college, the beneficiary can be changed to another child or grandchild.

Coverdell Education Savings Accounts

Like 529 plans, contributions to Coverdell Education Savings Accounts grow tax deferred. Contributions are limited to $2,000 per year per child and can be made only until the child reaches age 18 unless the child has special needs.

There are income restrictions for those making the contributions which make these accounts unsuitable for high income parents and grandparents.

Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.

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