Most life stages have their own financial needs and concerns and saving for college is no exception. The following examples can help you identify the key financial strategies and issues that are likely to be most important to you when preparing for the cost of college. Most feel the best savings vehicles offer special tax advantages if the funds are used to pay for post-secondary education. It is your responsibility to learn if the school you’ve chosen participates in this program.
College Savings Plans
There two types of 529 plans–College Savings Plans and Prepaid Tuition Plans. Both typically they have fees associated with them.
Note: Investors should get and read the prospectus for a 529 plan just as for any investment. Past performance is no indication of future results.
A 529 college savings plan is a tax-advantaged vehicle that lets you save money for college in an individual investment account. Cash contributions to your account grow tax deferred and are completely tax free if the money is used to pay the beneficiary’s qualified education expenses. You can change the beneficiary of your account to a qualified family member at any time without penalty.
College savings plans have some drawbacks. You relinquish some control of your money, returns aren’t guaranteed, and your account may gain or lose money.
Prepaid Tuition Plan
A 529 prepaid tuition plan lets you pay tuition expenses at participating colleges at today’s prices for future use and can be run either by states or colleges.
With a prepaid tuition plan you purchase an amount of tuition credits or units subject to plan rules and limits. Typically, the tuition credits’ value is guaranteed to be worth a certain amount of tuition in the future, regardless of tuition increases, and can provide some measure of security over rising college prices.
Prepaid tuition plans have some limitations. One major drawback is you are generally limited to your own state’s prepaid tuition plan and your child is limited to the colleges that participate in that plan. If your child attends a different college, prepaid plans differ on how much you’ll get back. Also, some prepaid plans have been forced to reduce benefits after enrollment due to weaker investment returns.
Other Savings Options
- Coverdell education savings accounts
- Custodial Accounts
- U.S. Series EE and I Savings Bonds
Financial aid impact
College saving can impact the financial aid process. At financial aid time, your family’s income and assets are run through a formula at both the federal and college (institutional) level to determine how much your family should be expected to contribute to college costs before you receive any financial aid. This number is referred to as the expected family contribution, or EFC.
In the federal calculation, your child’s assets are treated differently than your assets. Your child must contribute 20 percent of his or her assets each year, while parents must contribute 5.6 percent of their assets.