- Ways to Think about Financing Your Children’s College Education
- Ways to Save for College
- Ways to Invest and Grow Your Savings for College Tuition
- Sources of Possible Aid
- Borrowing Against Your Current Assets
- In a Tough Economy, the Federal PLUS Loan May Give Parents Extra Cash Needed for a Child's College Tuition
- The Basics of 529 Plans to Save and Invest for College
- New Student Loan Law Creates Big Changes for Borrowers
Ways to Invest and Grow Your Savings for College Tuition
It’s not enough to want to help your child afford college you need to have a plan to make it actually happen. However, putting money into a savings account at your bank or credit union won't earn enough interest to foot the bill. Instead you will need to learn more about and choose one – or even better, a few – different ways to save and invest for your child's college education. Following is a list of the most popular college savings and investment vehicles:
(1) State-Sponsored College Savings Plans
State-sponsored college savings plans, also known as 529 plans, are a very popular option for saving for a child’s college expenses. Here's how 529 college savings plans work: you deposit money in a state-sponsored account (either the state you live in or any other state). The account is overseen by either the state treasurer's office or a state-appointed program manager, usually an investment company. The program manager then invests the funds in a variety of stocks, bonds, CDs and mutual funds. The manager will move your money, over time, to gradually more conservative investments so that when it's time for your child to enter college, your money is invested in low-risk, liquid (meaning most quickly accessible) investments. This strategy is intended to give you the greatest return on your money by investing according to your investment horizon (how long you have until you need to access your funds.)
There are significant benefits to investing in a 529 college plan – most notably that:
- All earnings on your investment are federal income tax-free.
- Anyone can contribute to the plan (parents, grandparents, friends, etc.)
- The money can be used for almost any college-related expense and can be transferred to another sibling if your child doesn't attend school or if there is additional money left in the account after he/she graduates.
- As custodian of the account, you have complete control of the account.
You can get a list of all the 529 college savings plans available nationwide at the Collegesavings.org website (www.collegesavings.org). The website is part of The College Savings Plans Network, a national nonprofit dedicated to making college more accessible and affordable by helping families save in a 529 college savings plan. You can also compare plans by feature or by state on the website.
When considering a 529 college saving plan, here are some questions to ask yourself, a financial planner with whom you are working and/or the actual plan administrator:
What fees are associated with this plan (enrollment fees, application fees, maintenance fees, etc.)? Fees vary by state and there are differences. For example, one state’s plan may charge a yearly fee as a percentage of money invested. So if a state’s plan charges an annual fee of five percent of funds invested and you have $3,000 invested then you are going to pay $150. Compare that to another state’s plan that charges a 15 percent fee of funds invested and you will pay $450 for the same services.
- How do the amount of fees that I need to pay for this fund compare to how much money I could potentially earn in interest?
- How long has the state used this investment firm to manage the plan? What has the plan’s performance been so far? Has the state changed investment managers since starting the plan?
- Can I get a list of college savings plan offered from all 50 states?
- What penalties are there for early withdrawal or if I choose to withdraw the money for unqualified purposes (meaning for reasons not approved under the program guidelines)?
- What are the minimum and maximum contribution requirements?
- Are my contributions going to be exempt from state and federal income taxes?
- Is there an age limit or time limit on when I can take money out of this plan to pay for my child’s education?
After getting answers to these and any other questions you may have, take some time to compare plans carefully before investing. You may also want to consider meeting with a financial professional about investing in 529 plans as part of your overall strategy to save for college expenses.
Once you choose a plan and begin investing, review your plan’s earning statements on a regular basis to see how your investments are performing. You can also check Morningstar.com (www.morningstar.com) to see how your fund is performing. If you are not satisfied with the plan’s performance, you can talk with a financial professional to review your options within 529 plans and other college savings vehicles such as those listed below. Or call the contact number listed in the information you received on the plan and ask to speak with an investment person there.
If you stop investing in the plan you have chosen you should seriously consider keeping the money there until you need to withdraw the funds for your child’s college expenses or you will incur an early withdrawal penalty. You could also open another 529 Plan in another state and begin investing in that plan in addition to what you already have invested in the first plan. Most states do not have a residency requirement to open an account and there is no limit to the number of plans you can invest in.
(2) Prepaid Tuition Plans
Locking in the cost of your child's college tuition before he/she is ready to attend is the concept behind a prepaid tuition plan. You choose a college - or a group of colleges (for example, all public colleges in your home state) - and you stash money away in a fund to cover the cost of tuition when your child is ready to attend. Of course, depending on how young your child is it might be a bit difficult to figure out which school he/she will want to go to. If he/she chooses not to go to school, or chooses to go to a school other than the one you've selected, the amount you'll get back from the plan varies. When looking at possible colleges and universities ask if they offer a prepaid tuition plan or locate and contact your State Treasurer to learn about prepaid tuition plans in your state.
(3) UGMA and UTMA Accounts
UGMA stands for "Uniform Gifts to Minor Act." UGMA accounts and UTMA ("Uniform Transfers to Minor Act") accounts are also called custodial accounts. That means that until your child turns 18 (or 21 in some states), you are the custodian of the account and have full responsibility for how your money is invested and used. After your child reaches the legal age, however, the account becomes his/her property. The money can be used for college or for any other expense for the child while he/she is a minor. Once the account becomes their property, he/she is allowed to use it for any purpose. You cannot transfer the account to another sibling and the beneficiary must be a U.S. citizen. Talk with a representative at your bank or credit union about how to set up an UGMA or UTMA account.
(4) Coverdell Education Savings Accounts (formerly known as Education IRAs)
Coverdell ESAs won't allow you to sock away a tremendous amount of money for college costs, but they're a good place to park some savings. You, or anyone else (grandparents for example), can deposit up to $2,000 annually in this IRA. All interest earned on the money is tax-free as long as it is used for your child's qualified college expenses.All beneficiaries must be U.S. citizens. You can talk with a representative at your bank or credit union, with a financial planner, or click here for a list of low-cost Coverdell ESA providers from Savingforcollege.org that charge $10 or less to open and maintain an account.
(5) Series EE Bonds/Savings Bonds
These bonds issued by the federal government are another way to save for your child's college education. You can buy a bond for as little as $50, and you can even buy them online at www.publicdebt.treas.gov. The interest rate on these bonds adjusts twice a year and they can be cashed in after six months of buying/receiving them.
For more information on financing a college education, check out the following links: