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College Savings Vehicles for Low-Income Earners









When you’re busy worrying about how to make ends meet, college savings is the last thing on your mind. It’s important to keep in mind, however, that you have options — even when it feels like college is a distant fantasy for your child.

Even a small monthly investment adds up over time and reduces your out-of-pocket college costs. The key is making the commitment and making a plan. Let’s dive in!


Tax-free option: Coverdell Education Savings Account

The Coverdell Education Savings Account (ESA) lets you set aside up to $2,000 of post-tax dollars annually toward a student’s education expenses incurred in the elementary, secondary or college years. The account grows free of federal income taxes, and withdrawals used to pay the beneficiary’s qualified education expenses are tax-free, with some caveats. Some portion of an ESA withdrawal may be taxable — for instance, if a family is claiming the American Opportunity tax credit or Lifetime Learning credit.



  • Offset the costs of not only higher education, but also elementary and secondary school
  • You’re free to choose the investments you want to put into the account
  • You can change the beneficiary if needed, penalty-free
  • Simultaneously contribute to both a 529 plan and a Coverdell ESA in the same year for the same beneficiary
  • Coverdell ESAs are treated as parental assets for purposes of financial aid, and distributions are not considered parent or student income


  • The annual contribution limit is $2,000
  • Contributions cease after the student reaches age 18, unless the beneficiary has special needs
  • Any withdrawals from a Coverdell ESA that are not used for qualified education expenses are taxed and penalized
  • There may be fees charged from the financial institution for maintaining the account


Tax-deferred option: Roth IRA

If you like the idea of protecting your money from taxes, a Roth IRA can be a good option. With a Roth IRA, you contribute after-tax dollars and are allowed tax-free withdrawals of those contributions for children’s college expenses.



  • You pay no extra federal taxes if you withdraw the amount of money you contributed
  • You pay no federal taxes on the earnings or profits spent on college tuition



  • Fund companies may require minimum initial payments, such as $2,500 a year or $200 a month
  • Although relatives can contribute to a Roth IRA, they might be more likely to donate to a specific college fund rather than your retirement fund
  • You cannot deduct contributions from federal income taxes


Regular savings account

If you’re new to the concept of saving money, a regular savings account is an easy, hassle-free way to get started. You can drop by your financial institution and set it up today with a minimal initial investment.


  • Low minimum deposit in most cases
  • Easy access to your money if you need it
  • Interest accrues on money that otherwise would be sitting in your wallet or checking account


  • Easy access to your money (too easy to withdraw anytime an expense comes up)!
  • Lower returns than many other forms of college savings
  • No tax benefits; pay tax on interest


Why bother? I can’t afford to contribute.

You’d be surprised how much you can save if you simply cut back in other areas. That $4 latte won’t taste as good if it means sacrificing your child’s future, so the key is to change your habits and thinking.

Consider this: If you set aside just $50 per month when your child is born, you’ll accrue $21,000 by the age 18, assuming a 7 percent interest rate. 



Every little bit helps.

You can’t afford not to fund your child’s college education. Even with no investin g experience and a small budget, you can set aside moderate amounts each month. And when it comes time for college funding, you’ll be ahead of the game.





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