Subsidized Loans vs. Coverdell ESA

Paying for College
1

<p>After reviewing our FA packages, they include roughly $5k of subsidized loans for freshman year. Conveniently, we have roughly $20k saved in a Coverdell ESA for college expenses, which divides out to $5k per year.</p>

<p>Would there be an advantage to using the ESA money instead of the loans? I assume that having the balance in the ESA reduced by $5k would mean a slightly lower parent contribution for sophmore year. However, this might be offset to an extent by the additional growth of keeping the ESA money for four more years (~2% per year times four years).</p>

<p>Could we use the ESA money after graduation to pay off the accumulated loans if we accept the loans? I can’t seem to find the rules for what is allowed and I am just trying to be prudent in how we use our savings.</p>

2

<p>I don’t think you can use ESA to pay off the loan after your student graduates. But there is no reason why you can’t take the $5k subsidized loan and put it in other vehicle to make interest and pay it off when your student graduates.</p>

<p>Basically, the qualified expense has to be accounted for within the same tax year as your withdrawal of the ESA money.</p>