| Kate Rhoten
It was that time of year again. Graduation ceremonies and open houses started taking place at the end of May and on into June. I don’t have a graduate, but my oldest son is entering high school this year. We are only four years away from the one event most families and students look forward to with the hopes of college afterwards.
Hopes and dreams of college can’t be just that. It takes work by the student and a plan for paying for tuition, room and board, books, and the other miscellaneous expenses. What are the savings options for the college dream?
First, there are 529 plans which are legally known as “qualified tuition plans.” The 529 in the name is in reference to section 529 of the Internal Revenue Code pertaining to college savings and how the money is treated for tax purposes when money is withdrawn from the plan. The 529 is available in two types of plans: pre-paid tuition and college savings plan.
Pre-paid tuition plans are usually sponsored by state governments and do have residency restrictions. Some of the states that offer the pre-paid tuition guarantee the investments they sponsor. The tuition that is being pre-paid is locked in per unit or credit. Some private colleges and universities sponsor pre-paid tuition plans.
There has been news that some states have stopped offering the pre-paid tuition plans to their residents, and many do not have guarantees. In USA Today, June 8, 2012, an article reported that several of the 11 still open pre-paid tuition plans were not offering guarantees. In fact, some have increased their premiums well above the cost of current tuition.
A college savings plan works like a retirement account in that you can put money in the account that is owned by a parent or relative. A beneficiary is named on the account; this is the person who will use the funds for college. Within the plan, there are many investment options ranging from stock mutual funds, bond mutual funds, and money market funds, as well as age-based portfolios. Age-based portfolios put the account on autopilot meaning that as the student gets closer to college age, the portfolio becomes more conservative. There are no guarantees with this plan as the account is subject to market risk. The opportunity to put money in each month and possibly have growth over time can create a nice little chunk of money for college expenses. The Indiana 529 Savings Plan gives a tax credit (not deduction) to contributors of the plan. The credit is 20% of what is contributed with a max of $1,000 tax credit per year.
Another option you may have heard about is the Coverdell Education Savings Account. These were around long before the 529 and work in the same manner with a contribution limit of $2,000 per year. It is a little more lenient as the funds can be used for primary school, not just college. I worked in the banking industry, and many institutions no longer offer Cloverdell accounts.
The challenge with college planning is to understand what you can and can’t do with the accounts as well as the risks associated with each of these plans. Since 1990 through 2011, tuition has increased 7% annually. I don’t know about you, but I think this is a little scary. Our incomes are not going up this fast. We can hope for a windfall (lottery anyone?), or we can plan as early as when the kiddos are crawling. The key is to know the options available and understand what you are doing. Work with an investment specialist to learn about these options.
In four years, I hope I will be celebrating the success of my son’s high school years and preparing to send him off to college. It will be here before I know it, so I’ve been told.
Kate is a financial expert of what to do and not do with money as well as owner of 4 Walls Money Coach, A Coaching-Focused Company. She has attended and completed Dave Ramsey’s Counselor Training. Follow Kate on Twitter 4WFCoach, reach out to her via email at kate.4walls@gmail.com or visit www.4wallsmoneycoach.com. Feel free to share ideas or questions for future articles.
