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Free Money for College Savings

Mark Kantrowitz

March 04, 2011

There are a variety of national, state and local programs that encourage families to save for college by providing families with free money. There are two main types of such programs:

1. Birthday Present. Such programs provide contributions of $100 to $1,000 as seed money in the college savings plan when the parents open a new 529 college savings plan before the child’s first birthday. These programs usually do not have income restrictions.

2. Matching Grants. Such programs match contributions by low and moderate income families to their children’s 529 college savings plans.

In addition, about three dozen states have a state income tax deduction for contributions to the state’s 529 college savings plan.

Generally, either the account owner or the beneficiary must be a state resident to qualify for the matching grant program. The match must be used for qualified higher education expenses or it will be forfeited. The match will also be forfeited if the beneficiary is changed. Families must apply annually to receive a match.

For more information on this topic, see the College Savings Initiative, a joint project of the New America Foundation and the Center for Social Development.

Individual Development Accounts

Individual Development Accounts (IDA) are special savings accounts that help low and moderate income families save by matching their contributions. They are typically operated as partnerships between local non-profit organizations and local banks. There are more than 500 IDA programs in the US, each with different criteria. The Corporation for Enterprise Development (CFED) maintains a directory of IDA programs. Most IDA programs are designed to help low and moderate income families save for college or job training, purchase a first home or start a small business. On average, about a fifth of IDA program funds are used by participants to pay for education. IDA program participants are twice as likely to enroll in college. Typically the IDA programs will match contributions dollar for dollar up to an annual limit for one to three years. Some will match contributions at a $2 for $1 or $3 for $1 rate. The IDA programs provide (and require) the participants to receive free financial literacy training. The US Department of Health and Human Services (HHS) is the largest funder of IDA programs through Assets for Independence (AFI). These programs receive up to $2,000 in federal matching funds per participant, without affecting SSI benefits. Participants in AFI-funded programs must be eligible for TANF or EITC or have income below 200% of the poverty line.

Next: State Grant Programs

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