How much can I deposit in a Coverdale ESA?

Taxpayers may deposit up to $500 per year into an Education IRA for a child under age 18. Parents, grandparents, other family members, friends, and a child him/herself may contribute to the child’s Education IRA, provided that the total contributions for the child during the taxable year do not exceed the $500 limit. Amounts deposited in the account grow tax-free until distributed, and the child will not owe tax on any withdrawal from the account if the child’s qualified higher education expenses at an eligible educational institution for the year equal or exceed the amount of the withdrawal. If the child does not need the money for postsecondary education, the account balance can be rolled over to the Education IRA of certain family members who can use it for their higher education. Amounts withdrawn from an Education IRA that exceed the child’s qualified higher education expenses in a taxable year are generally subject to income tax and to an additional tax of 10 percent. The Hope Scholarship Credit and Lifetime Learning Credit may not be claimed for a student’s expenses in a taxable year in which the student takes a tax-free withdrawal from an Education IRA.

Educational Savings Bond

The Savings Bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of eligible Series EE and I Bonds issued after 1989 in the name of a taxpayer age 24 or older at the date of issuance. To qualify for this exclusion, tuition and other educational expenses must be incurred by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent at certain post-secondary educational institutions.

Stafford Loan Overview

Stafford Loans are a major form of self-help aid for students. Depending on the school you attend, your Stafford Loans may be made either through the Direct Loan Program or through the FFEL Program.

If you’re a dependent undergraduate student you can borrow annually up to

  • $2,625 if you’re a first-year student enrolled in a program of study that is at least a full academic year.
  • $3,500 if you’ve completed your first year of study and the remainder of your program is at least a full academic year.
  • $5,500 if you’ve completed two years of study and the remainder of your program is at least a full academic year.

If you’re an independent undergraduate student or a dependent student whose parents are unable to get a PLUS Loan, you can borrow annually up to

  • $6,625 if you’re a first-year student enrolled in a program of study that is at least a full academic year (only $2,625 of this amount may be in subsidized loans).
  • $7,500 if you’ve completed your first year of study and the remainder of your program is at least a full academic year (only $3,500 of this amount may be in subsidized loans).
  • $10,500 if you’ve completed two years of study and the remainder of your program is at least a full academic year (only $5,500 of this amount may be in subsidized loans).

If you’re a graduate or professional student:

  • For graduate and professional students, the combined annual loan limit for subsidized and unsubsidized Federal Stafford Loans is $18,500 ($8,500 can be subsidized loans). The maximum for the subsidized Federal Stafford loan is $65,500. The maximum for a combination of both unsubsidized and subsidized Federal Stafford loans is $138,500.

Additional rules covering Federal Stafford Loans:

  • Interest rates are capped at 8.25%
  • You have up to 25 years to repay, although 10 years is the norm.
  • Payment begins 6 months after you graduate or are enroled on less than a half time basis.

Educational Saving Bonds Overview

The Savings Bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of eligible Series EE and I Bonds issued after 1989 in the name of a taxpayer age 24 or older at the date of issuance. To qualify for this exclusion, tuition and other educational expenses must be incurred by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent at certain post-secondary educational institutions.

FSEOG: Federal Supplemental Educational Opportunity Grant

FSEOG is for undergraduates with exceptional financial need-that is, students with the lowest Expected Family Contributions-and gives priority to students who receive Federal Pell Grants. An FSEOG doesn’t have to be paid back.

The U.S. Department of Education guarantees that each participating school will receive enough money to pay the Federal Pell Grants of its eligible students. There’s no guarantee every eligible student will be able to receive an FSEOG; students at each school will be awarded an FSEOG based on the availability of funds at that school.

You can receive between $100 and $4,000 a year, depending on when you apply, your need, the funding level of the school you’re attending, and the policies of the financial aid office where you attend school.

529 Plans Overview

State-sponsered 529 plans offer significant tax benefits for college bound students.  There are two types of 529 plans available which include guaranteed tuition plans and mutual fund-based plans.  In many states the 529 Guaranteed Savings Plans allow parents, grandparents and others to purchase college tuition credits at today’s prices for use in the future, no matter what the inflation rate for college tuition.  Mutual fund-based 529 accounts, put the burden of investing on the parents. Most states offer portfolios made up of several mutual funds, and investors choose a portfolio based on their time frame and risk tolerance.  Many plans offer age-based portfolios that move the funds into more conservative investiments as your child approaches college age.

The new tax law makes the Section 529 college investments plans very attractive:

  • The earnings of a 529 account are not federally taxed as they accumulate.  Withdrawals from 529 plans are completely federal tax-free, if the money is spent on qualified educational costs.  The investments into 529s are made with after tax dollars.  Only cash can be invested into 529 plans.
  • Some state plans allow for contributions to and withdrawels from 529 plans to be exempt from state tax.  That makes several in-state 529 plans a great choice.  Some states have a $2,000 dollar limit exemption of state taxes and a few states have no limit on tax free contributions or withdrawels. Check your state plan in the Links>College Savings Plans>529 Plans
  • Any 529 plan can be transfered from one child to another. This is especially good news if the first child does not spend the entire funding amount. Also, you can have one plan for your first child and transfer the plan after the first student graduates, thus saving 529 management fees for two plans, if there is enough break between their college.
  • Contributions into 529 plans can be made by parents, grandparents and anyone else that wants to contribute to the childs college fund.
  • Many state 529 plans have a maximum contribution of over $200,000, which should satisfy any future college expenses.
  • 529 plans have a very high contribution level of $11,000 per year, starting in 2002. Another great feature is that a contributor can fund up to $55,000 as a one time contirbution covering the next five years. This is a great opportunity for wealthy individuals interested in minimizing estate taxes.
  • Unlike the old UGMA, the donor controls how the money is spent in a 529 plan.  Under the UGMA, when the child becomes an adult, they can spend the money any way they want, even buying a fancy sports car.

Some disadvantages of 529 plans:

  • Administrative and management fees for 529 plans are higher than comparable mutual funds. Until your account reaches a minimum level, expect to pay an annual maintenance fee.  Many states have more reasonable fee structures, check out the 529 plan links.
  • Investment opportunities are restricted to certain mutual funds, limiting the investment potential.
  • Expect to pay more if you go through a Broker. If possible, go directly to the state 529 plan. (See Links: College Saving Plans> 529 Plans)

 

Coverdale Educational Savings Account (ESA)

Taxpayers may deposit up to $2000 per year into an Coverdale ESA for a child under age 18, if your taxable income is less than $95,000 (single) and $190,000 (married) and disappear at $110,000 and $220,000. Parents, grandparents, other family members, friends, and a child him/herself may contribute to the child’s Coverdale ESA.  Each child may only have $2,000 contributed in their name per year.  That is, if the grandparents contribute $1,000 to a plan they set up, then the parents can only place $1,000 in a plan.  Great news, starting in 2002, you can contribute to both a 529 plan and a Coverdale ESA.

The new tax law makes the Coverdale ESA plan very attractive:

  • The earnings of a Coverdale ESA are not federally taxed as they accumulate.  Withdrawals from the account are completely federal tax-free, if the money is spent on qualified educational costs.  The contributions are made with after tax dollars.  Only cash can be invested into Coverdale ESA.
  • The choice of investments are much broader than the 529 mutual plans.  Therefore, the money has a chance to perform better than the 529.  If you are investment savy, then this plan might warrent a close evaluation.
  • Coverdale plans often cost less to manage and maintain than the 529 plans.  Therefore more of the contribution dollars are available for growth.
  • Maybe most importantly, the Coverdale ESA can be used for elementry and secondary education.  If you invest early enough, the Coverdale can help in private schools.

Some disadvantages of Coverdale ESAs:

  • Coverdale ESAs have a limit of $2,000 per year per child, and the income limits as stated above.
  • Some 529 plans are exempt from state income tax for contributions and withdrawels.  This is a big disadvantage for the Coverdale ESA, which does not receive this state tax break.
  • Contributions for the Coverdale are limited to the child’s age of 18.