Savings options for education expenses

While you may not be able to avoid the “Mom, can I borrow $20 for gas?” questions that eat into your budget as your child grows up, there’s one thing you can do to help yourself and your children get ready for tomorrow’s financial demands: Prepare for college expenses now.

Two-thirds of 2011 college graduates had an average of $26,600 in student loan debt, according to the Institute for College Access & Success. No matter how young or old your children are, consider these options to financially prepare now.

Start a regular savings account for college

Both you and your children can contribute to this account, and your relatives can give you or your children money to deposit as well. You can easily set up an account at your local bank or credit union, or through an online bank.

Start a 529 savings plan

Section 529 education savings plans are operated by a state or educational institution and designed to help families set aside money for future college costs. The money is controlled by the owner of the account, not the child. Contributions can be as low as $25. North Carolina’s National College Savings Program 529 plan is open to residents of any state, with distinct advantages to North Carolinians. The earnings of an account in North Carolina’s NC 529 plan are free from federal taxes and, for North Carolina residents, from North Carolina income taxes, as long as the college savings are used for “qualified higher education expenses,” such as tuition and required equipment. There’s an additional tax benefit for North Carolina taxpayers as well. State taxpayers contributing to the plan may be eligible for an annual state tax deduction. For more information or to enroll in the NC 529 plan, you can request an enrollment kit at (800) 600-3453 or visit cfnc.org/NC529.

Open a Coverdell education savings account

This is a custodial account that can be used to save for elementary and secondary school, and college-related expenses. Income maximums apply, so not everyone will qualify for this type of account. The money deposited into a Coverdell account grows tax-deferred until it is used for educational expenses. Withdrawals from the account may be tax-free if used for tuition, fees, books and other expenses. Any money not used for education eventually must be distributed to your child.

Open a UTMA

This acronym stands for Uniform Transfer to Minors Account. Under this, a parent or grandparent typically will gift money to the account. The money is owned by the child but controlled by the custodian until the child reaches the age of majority, which is set by state law. In North Carolina, it is 21. At that point, the child assumes control of the account.  Like all options, it has its pros and cons. How the money is used is not restricted, a possible disadvantage if she or he decides not to go to college or isn’t sufficiently mature to handle money. For more information, consult with an independent legal or financial advisor.

Buy U.S. savings bonds

Certain savings bonds can be purchased to pay for college tuition and fees without having to pay federal income tax on some or all of the interest during the year the bonds are redeemed. Certain restrictions apply — learn more at TreasuryDirect.gov.

For more help — including the tax ramifications of these options — consult a financial or tax professional.