Like HowStuffWorks on Facebook!

Can college debt save me money on my taxes?

        Money | Taxes

Savings Accounts

In addition to tax credits and deductions, you also have two programs available for investing for the future for educational expenses and watching those funds grow tax-free. These two programs are known as the Coverdell Education Savings Account and the 529 college savings plan.

For the Coverdell Education Savings Account, you can invest up to $2,000 each year for elementary, secondary or postsecondary education expenses to a savings account for a beneficiary who is either younger than 18 or has special needs [source: USA Funds]. You can claim the Hope/American Opportunity or Lifetime Learning Credit and take a withdrawal from your account in the same calendar year; however, the funds cannot be used on an expense for which a tax credit was taken. The funds you put in this account are not tax deductible, but you do not pay taxes on withdrawals.

Just as with some of the prior programs discussed, there are income requirements for the Coverdell Education Savings Account. Here's the breakdown:

  • Individuals who can contribute full amount - Those with a modified adjusted gross income at or less than $95,000 for single returns and $190,000 for joint returns [source: USA Funds]
  • Individuals whose contribution levels will be phased out - Those with a modified adjusted gross income of less than $110,000 but greater than $95,000 for single returns and less than $220,000 but greater than $190,000 for joint returns [source: USA Funds].

With 529 college savings plans, you may also invest after taxes and then withdraw funds tax-free to pay for qualified higher-education costs, such as tuition and fees, supplies and books. A main difference with these plans, though, is that there are no income restrictions. States administer their own plans, but you can invest with any state. With 529 plans, you have the choice of prepaid plans, where you pay for a portion or a full year of tuition ahead of time -- locking in that price for the future -- or investment plans, where you choose how to invest your funds and then have the ability to use it toward educational costs at a variety of places.

With these savings accounts and the tax savings potentially available to you through your education debt, school costs are just a little bit more manageable. And now that you are in the know, you can put that money back in your book bag -- right next to your less-expensive, used books!

For more information on saving money and other personal finance topics, visit the links on the next page.


More to Explore