Plans for College Savings
For parents planning for their children's college education, there are several investment options to consider. One option that seems appealing is state-sponsored prepaid tuition plans available in several states. These plans allow parents to pay today's tuition rates with the assurance that the child will have the money to go to college when the time comes. They also allow participants to defer paying federal income tax on earnings until money is withdrawn for college.
These plans sound very attractive because of their guarantee as well as relative simplicity. Prepaid tuition plans differ from college savings plans that seek higher returns not tied to the increase in tuition. College savings plans do offer the potential for higher returns than the rate of tuition inflation, but there is a risk that your investment could lose value.
Prepaid tuition plans allow parents to lock in a tuition rate and begin paying the cost of college today.
If college is still a long-term consideration, parents may get a better rate of return by investing in stocks or a state-sponsored college savings plan that seeks higher returns.
Many plans do not allow for account transfers or payments to out-of-state colleges. Withdrawal of funds for anything other than tuition can result in substantial penalties.
Assets are attributed to the account owner, not the beneficiary, resulting in a lower impact on need-based financial aid.
Parents can also purchase CDs guaranteed to pay a full year's average tuition through College Savings Bank in Princeton, New Jersey.
Questions to Ask:
Is it transferable? To whom? When?
What is the enrollment period?
What costs are covered?
Can out-of-state residents participate?
What happens if you stop paying?
What happens if your child goes to private college?
What happens if your child goes to out-of-state college?
What is the tax effect?
Read the fine print on each prepaid tuition plan you evaluate. Make sure you understand all the fees and rules.
If you have more than one child, consider signing up for a plan that would let you transfer one child's unused money to a sibling.
If relatives ask for gift ideas, suggest a contribution to your child's prepaid tuition plan.
Encourage your child to contribute earnings from part-time work. He or she may take a college education more seriously after playing a role in financing it.