What Can I Contribute to a College Education?

Individuals can support higher education by saving for a student’s future tuition or by making direct contributions to an educational institution. Understanding these methods helps in financial planning.

Saving and Paying for a Student’s Education

Saving for college expenses often involves specialized accounts. These vehicles allow individuals to set aside funds over time. Each option has unique characteristics regarding contributions, eligible expenses, and control over the funds.

A popular choice is the 529 plan, structured as either a savings plan or a prepaid tuition plan. With a 529 savings plan, contributions are invested and grow, with withdrawals for qualified education expenses being federal income tax-free. Qualified expenses include:
Tuition
Fees
Books
Supplies
Equipment
Room and board for half-time students
K-12 tuition up to $10,000 annually
Up to $10,000 in student loan repayments
Contributions can be significant, with individuals able to contribute up to $19,000 per beneficiary per year without incurring federal gift tax, or up to $95,000 as an accelerated five-year contribution.

Another option is a Coverdell Education Savings Account (ESA), which allows for tax-free growth and withdrawals for qualified education expenses, including those for elementary, secondary, and higher education. The total contributions for any one beneficiary cannot exceed $2,000 per year, regardless of the number of contributors. Contributions must be made before the beneficiary reaches age 18, unless they are a special needs beneficiary. Eligibility to contribute to a Coverdell ESA is subject to income limitations, with the ability to contribute phasing out for single filers with modified adjusted gross income between $95,000 and $110,000, and for joint filers between $190,000 and $220,000.

Custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, offer another way to save for a minor’s benefit, including education. Assets in these accounts are irrevocably owned by the minor, though an adult custodian manages the funds until the minor reaches the age of majority. These accounts have no contribution limits, but contributions exceeding the annual gift tax exclusion ($19,000 per individual in 2025) may be subject to gift tax reporting.

Roth Individual Retirement Accounts (IRAs) can also serve as a flexible savings tool for education, although their primary purpose is retirement. Contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time, as they are made with after-tax dollars. Earnings within a Roth IRA can also be withdrawn tax-free and penalty-free for qualified education expenses, provided the account has been open for at least five years. If the five-year rule is not met, the 10% early withdrawal penalty on earnings is waived for qualified education expenses, though the earnings portion may still be subject to income tax.

Making Direct Charitable Contributions to Colleges

Individuals can contribute directly to colleges as charitable donations. These donations can take various forms, each serving different institutional needs.

Annual fund donations provide immediate, unrestricted support for a college’s current operational needs. These funds are often used for student scholarships, academic programs, faculty development, and campus improvements. They collectively form a significant portion of an institution’s yearly budget.

Individuals or families may choose to establish named scholarship funds, allowing them to support students who meet specific criteria they define. This personalized approach to giving ensures that their contribution directly benefits students based on academic merit, financial need, or other factors. The college typically manages the administration of these scholarships, ensuring the funds are distributed according to the donor’s wishes.

Contributions to endowments represent a long-term investment in a college’s future. An endowment is a fund where the principal is invested, and a portion of the earnings is used for institutional purposes, providing a perpetual source of income. Donating to an endowment helps secure the college’s financial stability for generations.

Other giving opportunities exist, such as supporting specific academic departments, funding research initiatives, or contributing to capital projects like new buildings or facility renovations.

Navigating Financial Aid and Tax Implications

Understanding the financial aid and tax implications of various college contributions is important. The way assets are held and distributed can significantly affect a student’s eligibility for financial aid.

The Free Application for Federal Student Aid (FAFSA) assesses assets differently based on who owns them. Parent-owned assets, including 529 plans owned by a parent, are assessed at a maximum rate of 5.64% when calculating the Student Aid Index (SAI). Conversely, student-owned assets, such as those in UGMA/UTMA accounts, are assessed at a higher rate of 20%.

Distributions from grandparent-owned 529 plans no longer impact federal financial aid eligibility for the 2024-2025 academic year and beyond, as they are not reported on the FAFSA. However, some private colleges using the CSS Profile may still consider these funds when awarding institutional aid. While Roth IRAs are not counted as assets on the FAFSA, withdrawals from these accounts are considered untaxed income in the year they are taken, which can potentially affect financial aid eligibility in subsequent application cycles.

Regarding tax implications, 529 plans offer tax-free growth and withdrawals when used for qualified education expenses. Similarly, Coverdell ESAs provide tax-free growth and withdrawals for qualified expenses. For Roth IRAs, contributions can always be withdrawn tax-free. Earnings are tax-free if the account is held for at least five years and the owner is 59½ or older, or if used for qualified education expenses, though the earnings portion may be taxable if the five-year rule is not met.

Direct charitable contributions to colleges may offer tax deductions for individuals who itemize deductions. Cash contributions to public charities are deductible up to 60% of an individual’s adjusted gross income (AGI), while non-cash contributions typically have limits of 50% or 30% of AGI, depending on the asset and the type of organization. For donations of $250 or more, a written acknowledgment from the organization is required to substantiate the deduction.