Savings for College: Investment Options, Student Loan Programs, and Savings Programs Designed to Pay for Children's College Education Costs
June 24, 2008
Money-Rates.com has updated their College Savings page with two new sites which offer parents new ways to pay for college for their children. The two sites Simpletuition.com and Greennote.com are described below with the rest of college saving alternatives.
529 Plans - A 529 plan, named after Section 529 of the Internal Revenue Code, is a savings plan designed to encourage saving for future college costs with tax advantages which vary from state to state. 529 plans, legally known as “qualified tuition plans,” are sponsored by either states, state agencies, or educational institutions. Currently there are two types of 529 plans: (1) pre-paid tuition plans and (2) college savings plans managed by fund managers. Investors can palce their funds in any 529 program, but lose potential state tax advantages but not using the designated fund manager in the state in which they reside. A complete list of 529 plans by state with fees, limits, and options is listed here. For investors looking for more information regarding 529 plans the NASD (National Association of Securities Dealers) has an excellent page set up here dedicated to 529 plans.
Custodial Accounts - These type accounts (either UGMA or UTMA) can be set up at a bank or brokerage firm and will give the designated custodian full discretion over investment decisions. Custodial accounts have no restrictions on deposits and no penalties for early withdrawal. The disadvantages of a custodial account is that they are taxed annually as well as at withdrawal. In addition at age 21 the child has complete control over the account and funds. The custodial accounts are best used by parents/custodians who are confident that their portfolio
management can outweigh the tax consequences of custodial accounts. Coverdell Education
Savings Account - The Education IRA has been renamed to the Coverdell Education Savings Account. The Coverdell ESA was created to give individuals a way to save for a child's elementary/secondary school education as well as for college, graduate school, or vocational school in the same investment vehicle. The account must be established for the benefit of a child under the age of 18 with all contributions made before the beneficiary's 18th birthday. An individual can contribute up to $2,000 annually to a child's Coverdell ESA if their modified adjusted gross income is less than $95,000 as a single tax filer, or $190,000 to $220,000 as a married couple filing jointly in the tax year in which they contribute. All earnings in the account will accumulate tax-deferred and can be withdrawn tax-free if used to pay for any qualified education expenses.
Independent 529 Plan - The Independent 529 Plan offer parents the chance to pay for college in the future at today's price which can lead to large discounts on future costs. The program co-sponsored between Independent 529 plan and TIAA-CREF allows allows you to prepay tuition today that your child can use later at any participating colleges. This program protects against increases in tuition and has no initial fees, no maintenance fees, and no annual fees��and is free from federal taxes. If one assumes that private college tuition inflation continues at an average rate of 5% per year and an Independent 529 Plan annual discount rate of 1%, then this is the equivalent of earning a 6% increase on those savings funds each year��tax-free. Currently over 200 major universities participate including schools rated in the top 20 academically like Stanford, Princeton, and Washington University. The universities are contractually obligated the tuition payments (called certificates) issued today even if the university withdraws from the program in the future. If a child is not accepted or does not wish to attend a school on the list of participants then there are three redemption options:
(1) You can get a refund and retain all the tax benefits for the withdrawal portion, if the funds are used for qualified higher education expenses.
(2) You can change the beneficiary.
(3) You can roll over an Independent 529 Plan account tax-free into a state-sponsored 529 plan.
More information about the Independent 529 Plan is available here.
529 Reward Credit Cards - Consumers who use a 529 reward credit card can earn rebates for their purchases which go directly into the 529 plan of their choice. Three credit card issuers with 529 reward programs are (1) Fidelity 529 College Rewards Card, (2) Citi Upromise Card, and (3) Babymint College Savings Card from MBNA.
Student Loans - Student loans are financial aid given to a student by a federal or private lender that is specifically intended for education costs. These loans usually carry lower interests than other loans and and can be issued by the government.
SimpleTuition.com is a comprehensive website which details Federal Stafford Student Loans, private student loans, and student loan consolidation options. The site has an interactive loan search tool which will bring up a list of potential lenders for a particular college and loan amount.
GreenNote.com is an innovative site that helps students obtain loans for college by setting up a social network with friends, families, and others. Members of the network can choose to lend money to the student through a secure online platform with flexible lending terms. With a current fixed lending rate of 6.8% students are well below market-rates on student loans which can typically be over 15%. Lenders can make a return on their investment through a professional secure online platform unavailable with most personal loans.
other college savings options include:
College Savings Bank - This bank offers a unique CD which indexes the interest rate paid on the CD directly to the year-to-year increase in college tuition. The College Savings Bank CD is a hedge against inflation (and tuition costs) without the stock market volatility of returns generated in a 529 plan.
Affinity Bank - Offers a 10% rate on kids savings accounts up to $500. While this $500 cap may not go far enough as a college saving program this is an excellent way to sock some extra money away for college while teaching your kids about savings. Imagine the fun when they realize the are earning twice the rate that Mom and Dad are earning.
Umbrella Bank - The Education Money Market offered by Umbrella Bank is currently yielding 3.40% on accounts of $500 or more. Umbrella Bank also offers a one-year Education IRA CD which yields 3.25%. HSBC Bank - Offers a 3.05% savings rate on joint accounts opened with both an adult and child's name. This may be an appropriate investment for parents who wish to park funds temporarily or maintain some discretionary control of the funds through college.
Zions Bank - Parents or grandparents can sign up their child for the Zions Bank Kidsgreen Savings Account which features no minimum deposit or monthly fees, new account kit with kids activity book explaining the fundamentals of banking, and a free session with a savings account specialist
State Farm Bank offers Fixed Rate CDs, Market Rate CDs, and mutual funds (via State Farm Insurance) which can be purchased in a Coverdell Education Savings Account and managed for the benefit of paying for a child's college costs.