About College Savings

Saving money for a child's college tuition is an important goal for parents. Unfortunately, college expenses seem to increase at a faster rate than many parents can manage to save money. To make matters worse, many parents have seen the value of their college savings decrease over the last couple of years as the stock market has declined. Nevertheless, even if saving for college seems overwhelming, a systematic savings plan and smart investment choices can make the dream of paying for college a reality. MoneyRates.com is reporting on the various savings options that parents have for college savings and where to go to find the best college savings deals.

College scholarships

One way to reduce college expenses is to qualify for academic scholarships. Even with the US economy growing very slowly, there are foundations, companies, and organizations that are giving away college money. Upromise by Sallie Mae announced this month that one hundred college students qualified for $2,500 in scholarships for a total award of $250,000. Winners were selected based on exceptional merit and demonstrated need. Many college savings experts recommend applying for scholarships and grants if your child has a good grades or exceptional talent in an area. Parents of young children, however, should not rely on the hopes that their child will qualify for a scholarship. The earlier parents can start saving for college, the easier paying future education expenses will be. Detailed below are various types of college savings programs for parents to review:

529 College Savings Plans

A 529 plan, named after Section 529 of the Internal Revenue Code, is a savings plan designed to encourage saving money for future college costs. The main feature of a 529 plan is that they offer a wide variety of investment options and tax advantages that 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 place their funds in any 529 program, but can lose potential state tax advantages if they do not use the designated fund manager for the state in which they reside. Picking the best 529 savings plan can be tricky. Parents have to evaluate the the various funds in a 529 plan, as well as the historical returns, portfolio holdings, and expense fees of each fund. In addition, it is important to choose a 529 plan with age-based options. For instance, a child only three years away from college should have a different allocation of assets than a child with another ten or twelve years to go before they enter college. Parents should also remember that 529 plans can be used to save for more than just four-year colleges and universities. 529 distributions can go to tuition and expenses for community colleges, graduate-level schools, and technical schools as long as they are accredited. A new bill has been introduced in Congress that would make permanent the recent 529 college saving plans rule changes introduced with the stimulus bill in 2009. These changes, introduced partially due to the stock market downturn, include allowing two withdrawals a year that can be used to pay for computers, books, and other expenses other than just tuition. Excellent resources for parents who want more information on college 529 savings plans include the complete list of 529 plans listed by state with fees, limits, and options on Sallie Mae's College Answer website and a page on the Financial Industry Regulatory Authority (FINRA) website dedicated to 529 plans. Many brokers receive a commission for steering parents to a particular 520 plan, so independent research on sites like these is always recommended. Moneyrates.com has also published a question-and-answer article on Section 529 College Savings Plans with useful information for parents.

Custodial accounts

Custodial 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. Custodial accounts are best used by parents/custodians who are confident that their portfolio management can outweigh the tax consequences of custodial accounts. If you are interested in setting up a custodial account for your child contact your bank or brokerage firm for more information.

Coverdell Education Savings Accounts

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 portfolio.

Independent 529 Plans

The Independent 529 Plan offer parents the chance to pay for college in the future at today's prices. This form of prepayment of college tuition can lead to large discounts on future costs. The program, co-sponsored between Independent 529 plan and TIAA-CREF, allows a parent to prepay tuition today that their child can use later at any participating college. This program protects against increases in tuition and has no initial fees, no maintenance fees, and no annual fees. The Independent 529 Plan is also free from federal taxes. What is the value in prepaying college expenses? If one assumes that private college tuition inflation continues at an average rate of 5 percent per year and factoring in the Independent 529 Plan annual discount rate of 1 percent, then this is the equivalent of earning a 6 percent rate on those savings funds each year tax-free. Currently over 200 major universities participate in the plan including top-ranked schools Stanford, Princeton, and Washington University in St. Louis. The universities are contractually obligated to honor 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.

Social networking and student loans

A student loan is financial aid given to a student by a federal or private lender that is specifically intended for education costs. These loans usually carry lower interest rates than other loans and are frequently issued by government agencies. Comparison sites like SimpleTuition allow parents and students to search for private and federal loans. Rates, terms, and the total cost of a student loan can all be compared and contrasted to help find the most appropriate loan for the potential student. Social networking is an innovative way to save for college. GreenNote is a social networking 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. Other social networking sites create similar savings goals that can be publicized in order to raise funds for college. Saving for college by using social networking tools helps create a sense of responsibility for the student. The student knows that they are being funded from personal contacts, not an impersonal government entity.

Upromise and reward credit cards

Consumers who use credit cards can combine everyday spending and college savings with many different reward credit card program. The largest credit card college savings program is offered from Upromise, owned by loan giant Sallie Mae. The Upromise program allows members to earn money for college from over 600 online retailers, more than 8,000 restaurants, and from participating grocery stores and drug stores. Funds can be invested directly into a savings account, the 529 plans of your kids, or earned funds can go to pay down an existing student loan.

Reward credit cards that pay cash-back from purchases directly to college savings plans are also available for consumers. Parents can find a card that pays back as much as 3 percent of all the purchases directly into a 529 plan. Imagine the comfort for a parent of knowing that a percentage of all their monthly credit card expenditures is going into their child's college savings program. Before signing up for a college savings reward card check the offering carefully to make sure that your state's 529 plan is included as one of the participating states. Visit the MoneyRates.com Credit Card page for more information on 529 cards and for the latest credit card rates and deals.

Bank accounts and U.S. Savings Bonds

What can a parent do if they do not have the risk tolerance for stock market swings in the college savings plans of their kids? Does losing money in a 529 plan keep them up at night? Bank accounts from FDIC-insured banks, including certificates of deposit, money market accounts, and savings accounts, give parents the opportunity to keep their funds insured up to $250,000 per depositor. A bank deposit account can be set up for a minor at a bank either jointly with a parent or in a custodial account. If a parent uses CDs to save for college, they can be assured that they will know precisely how much money will be available when they need it for college payments. The downside for parents who use bank CDs and other high interest savings accounts for college savings is that tuition inflation can outpace the interest rate on their bank savings account. If this happens, meeting college savings goals can be difficult.

One of the most traditional forms of college savings is U.S. Savings Bonds. Grandparents, aunts, uncles or family friends can all buy federally-backed savings bonds directly from the Treasury Department in denominations as low as $50. When you buy a savings bonds online, you are subject to a maximum of $5,000 in gifts per year for both Series EE Bonds and Series I Bonds. Savings bonds remain a favorite of senior citizens who appreciate the safety and security that purchasing a savings bond can offer. College savers who would like more information on purchasing U.S. Savings Bonds for college expenses can visit the Treasury Department's website.

Last Updated: 8/24/10