There's no doubt that a college education can be costly, so it’s important to start planning and saving for college as early as possible. One of the first steps you can take is to research your savings options. Some options come with substantial incentives, including tax benefits. In each case, carefully consider the potential risks, costs, and limitations before investing any money.
College Savings Plans and Savings Bonds
529 saving plans, which are mostly offered by individual state governments, carry many of the same federal tax benefits as Roth Individual Retirement Accounts (IRAs). There are two basic kinds of 529 plans:
- Pre-paid tuition programs allow savers to lock in today's prices for future tuition payments at designated universities.
- Traditional savings plans allow families to contribute money into investments or FDIC-insured deposit accounts. Under the FDIC's rules, in most cases, deposits that a 529-plan administrator places at a bank on behalf of different beneficiaries are federally insured up to $250,000 for each beneficiary.
U.S. Savings bonds are backed by the government, but one tradeoff for the safety of this type of investment is a moderate rate of return. For qualifying taxpayers, the interest earned is exempt from state or local income tax, and the bonds may be exempt from federal income tax when used for education expenses.
Tax Credits
In addition to these savings programs, you can also access two tax credits through the Internal Revenue Service:
- The American Opportunity Tax Credit provides for a maximum annual credit of $2,500 per eligible student for the first four years of higher education. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
- Lifetime Learning Credit (LLC) can be used to offset qualified tuition and related expenses paid for eligible students. There is no limit on the number of years you can claim the credit if the eligible student is yourself, your spouse, or a dependent listed on your tax return.
College Savings Toolkit
If you are going to finance your education and want help making sense of student loan programs and financial aid offers, the Consumer Financial Protection bureau has developed a toolkit that explains the ins and outs of financial aid and loan repayment options to help you make smarter decisions about how to pay for college.
Your Employee Assistance Program is Here to Help
If you want expert guidance on starting a college fund or assistance with a scholarship search, your Component Employee Assistance Program (EAP) can help. Your EAP provides offers objective and practical financial information and financial planning tools.
If you have additional questions or would like more information, contact your Component EAP or send an email to our Work-Life Team at worklife@hq.dhs.gov.