Saving for College

Start saving for college when your child is born. If you are past that point, start saving now!

A 529 plan is a tax-advantaged investment used to save money for future college expenses of a designated beneficiary, usually a child. There are two types of 529 plans: prepaid and savings. Prepaid plans allow one to purchase tuition credits at today's rates to be used in the future. Twelve states provide a prepaid tuition plan. Savings plans value grows based upon the performance of the underlying investments, typically mutual funds. 529 savings plans typically offer age-based asset allocation options. The investments become more conservative as the beneficiary gets closer to college age. Prepaid plans are administered by states or colleges. Savings plans are administered by states. Record-keeping and administrative services are often delegated to a financial services company. A 529 plan can provide an easy hands-off way to save for college. Once you decide which 529 plan to use, you complete an enrollment form and make a contribution or sign up for automatic deposits. The ongoing investment is handled by the plan, not by the donor. Plan assets are professionally managed. 529 plans generally have low minimum start-up and contribution requirements.

In my humble opinion, parents should start saving for college as soon as they are married, or at least "get together". I say that because there are too many families who do not have any savings fund, let alone a college fund. Every family should meet with a financial advisor as soon as possible. Start saving 5% right off the top of the salaries being earned, start a 529 plan, a Roth IRA, start buying small qualtities of stock, through a reputable company. There are a number of things parents can do from the start to provide a comfortable life for their children who decide to attend college, and themselves as retirees.

The lingering thought of how to pay for college is constant for both students and parents. It is never too early to start saving for college. It is a good idea to start a savings account when your child is young. Even if you add just ten dollars a week into the savings account, every dollar counts. Scholarships and grants are also great to consider when factoring in financial aid. Children as young as nine years old can start writing essays for scholarships and save the funds for post secondary education.

Short Answer: A 529 plan is a savings plan specifically created to assist families in saving for college. Talk to your bank or a financial adviser about pursuing this option. Detailed Answer: This is complicated stuff, so I have copied (below) the information directly from the government's Security and Exchange Commission web site (http://www.sec.gov/investor/pubs/intro529.htm). I feel that this information explains these plans clearly, and goes into important detail should you want to know more. An Introduction to 529 Plans What is a 529 plan? A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan. What are the differences between pre-paid tuition plans and college savings plans? Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in pre-paid tuition plans that they sponsor. College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured. How does investing in a 529 plan affect federal and state income taxes? Investing in a 529 plan may offer college savers special tax benefits. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. Many states offer state income tax or other benefits, such as matching grants, for investing in a 529 plan. But you may only be eligible for these benefits if you participate in a 529 plan sponsored by your state of residence. Just a few states allow residents to deduct contributions to any 529 plan from state income tax returns. If you receive state tax benefits for investing in a 529 plan, make sure you review your plan’s offering circular before you complete a transaction, such as rolling money out of your home state’s plan into another state’s plan. Some transactions may have state tax consequences for residents of certain states. What fees and expenses will I pay if I invest in a 529 plan? It is important to understand the fees and expenses associated with 529 plans because they lower your returns. Fees and expenses will vary based on the type of plan. Prepaid tuition plans typically charge enrollment and administrative fees. In addition to “loads” for broker-sold plans, college savings plans may charge enrollment fees, annual maintenance fees, and asset management fees. Some of these fees are collected by the state sponsor of the plan, and some are collected by the financial services firms that the state sponsor typically hires to manage its 529 program. Some college savings plans will waive or reduce some of these fees if you maintain a large account balance or participate in an automatic contribution plan, or if you are a resident of the state sponsoring the 529 plan. Your asset management fees will depend on the investment option you select. Each investment option will typically bear a portfolio-weighted average of the fees and expenses of the mutual funds and other investments in which it invests. You should carefully review the fees of the underlying investments because they are likely to be different for each investment option. Investors that purchase a college savings plan from a broker are typically subject to additional fees. If you invest in a broker-sold plan, you may pay a “load.” Broadly speaking, the load is paid to your broker as a commission for selling the college savings plan to you. Broker-sold plans also charge an annual distribution fee (similar to the “12b 1 fee” charged by some mutual funds) of between 0.25% and 1.00% of your investment. Your broker typically receives all or most of these annual distribution fees for selling your 529 plan to you. Many broker-sold 529 plans offer more than one class of shares, which impose different fees and expenses. Here are some key characteristics of the most common 529 plan share classes sold by brokers to their customers: * Class A shares typically impose a front-end sales load. Front-end sales loads reduce the amount of your investment. For example, let’s say you have $1,000 and want to invest in a college savings plan with a 5% front-end load. The $50 sales load you must pay is deducted from your $1,000, and the remaining $950 is invested in the college savings plan. Class A shares usually have a lower annual distribution fee and lower overall annual expenses than other 529 share classes. In addition, your front-end load may be reduced if you invest above certain threshold amounts – this is known as a breakpoint discount. These discounts do not apply to investments in Class B or Class C shares. * Class B shares typically do not have a front-end sales load. Instead, they may charge a fee when you withdraw money from an investment option, known as a deferred sales charge or “back-end load.” A common back-end load is the “contingent deferred sales charge” or “contingent deferred sales load” (also known as a “CDSC” or “CDSL”). The amount of this load will depend on how long you hold your investment and typically decreases to zero if you hold your investment long enough. Class B shares typically impose a higher annual distribution fee and higher overall annual expenses than Class A shares. Class B shares usually convert automatically to Class A shares if you hold your shares long enough. Be careful when investing in Class B shares. If the beneficiary uses the money within a few years after purchasing Class B shares, you will almost always pay a contingent deferred sales charge or load in addition to higher annual fees and expenses. * Class C shares might have an annual distribution fee, other annual expenses, and either a front- or back-end sales load. But the front- or back-end load for Class C shares tends to be lower than for Class A or Class B shares, respectively. Class C shares typically impose a higher annual distribution fee and higher overall annual expenses than Class A shares, but, unlike Class B shares, generally do not convert to another class over time. If you are a long-term investor, Class C shares may be more expensive than investing in Class A or Class B shares. Is there any way to purchase a 529 plan but avoid some of the extra fees? Direct-Sold College Savings Plans. States offer college savings plans through which residents and, in many cases, non-residents can invest without paying a "load," or sales fee. This type of plan, which you can buy directly from the plan's sponsor or program manager without the assistance of a broker, is generally less expensive because it waives or does not charge sales fees that may apply to broker-sold plans. You can generally find information on a direct-sold plan by contacting the plan’s sponsor or program manager or visiting the plan’s website. Websites such as the one maintained by the College Savings Plan Network, as well as a number of commercial websites, provide links to most 529 plan websites. Broker-Sold College Savings Plans. If you prefer to purchase a broker-sold plan, you may be able to reduce the front-end load for purchasing Class A shares if you invest or plan to invest above certain threshold amounts. Ask your broker how to qualify for these “breakpoint discounts.” What restrictions apply to an investment in a 529 plan? Withdrawal restrictions apply to both college savings plans and pre-paid tuition plans. With limited exceptions, you can only withdraw money that you invest in a 529 plan for eligible college expenses without incurring taxes and penalties. In addition, participants in college savings plans have limited investment options and are not permitted to switch freely among available investment options. Under current tax law, an account holder is only permitted to change his or her investment option one time per year. Additional limitations will likely apply to any 529 plan you may be considering. Before you invest in a 529 plan, you should read the plan’s offering circular to make sure that you understand and are comfortable with any plan limitations. Does investing in a 529 plan impact financial aid eligibility? While each educational institution may treat assets held in a 529 plan differently, investing in a 529 plan will generally reduce a student’s eligibility to participate in need-based financial aid. Beginning July 1, 2006, assets held in pre-paid tuition plans and college savings plans will be treated similarly for federal financial aid purposes. Both will be treated as parental assets in the calculation of the expected family contribution toward college costs. Previously, benefits from pre-paid tuition plans were not treated as parental assets and typically reduced need-based financial aid on a dollar for dollar basis, while assets held in college savings plans received more favorable financial aid treatment. Is investing in a 529 plan right for me? Before you start saving specifically for college, you should consider your overall financial situation. Instead of saving for college, you may want to focus on other financial goals like buying a home, saving for retirement, or paying off high interest credit card bills. Remember that you may face penalties or lose benefits if you do not use the money in a 529 account for higher education expenses. If you decide that saving specifically for college is right for you, then the next step is to determine whether investing in a 529 plan is your best college saving option. Investing in a 529 plan is only one of several ways to save for college. Other tax-advantaged ways to save for college include Coverdell education savings accounts, Uniform Gifts to Minors Act (“UGMA”) accounts, Uniform Transfers to Minors Act (“UTMA”) accounts, tax-exempt municipal securities, and savings bonds. Saving for college in a taxable account is another option. Each college saving option has advantages and disadvantages, and may have a different impact on your eligibility for financial aid, so you should evaluate each option carefully. If you need help determining which options work best for your circumstances, you should consult with your financial professional or tax advisor before you start saving. What questions should I ask before I invest in a 529 plan? Knowing the answers to these questions may help you decide which 529 plan is best for you. * Is the plan available directly from the state or plan sponsor? * What fees are charged by the plan? How much of my investment goes to compensating my broker? Under what circumstances does the plan waive or reduce certain fees? * What are the plan’s withdrawal restrictions? What types of college expenses are covered by the plan? Which colleges and universities participate in the plan? * What types of investment options are offered by the plan? How long are contributions held before being invested? * Does the plan offer special benefits for state residents? Would I be better off investing in my state’s plan or another plan? Does my state’s plan offer tax advantages or other benefits for investment in the plan it sponsors? If my state’s plan charges higher fees than another state’s plan, do the tax advantages or other benefits offered by my state outweigh the benefit of investing in another state’s less expensive plan? * What limitations apply to the plan? When can an account holder change investment options, switch beneficiaries, or transfer ownership of the account to another account holder? * Who is the program manager? When does the program manager’s current management contract expire? How has the plan performed in the past? Where can I find more information? Offering Circulars for 529 Plans. You can find out more about a particular 529 plan by reading its offering circular. Often called a “disclosure statement,” “disclosure document,” or “program description,” the offering circular will have detailed information about investment options, tax benefits and consequences, fees and expenses, financial aid, limitations, risks, and other specific information relating to the 529 plan. Most 529 plans post their offering circulars on publicly available websites. The National Association of State Treasurers created the College Savings Plan Network which provides links to most 529 plan websites. Additional Information About Underlying Mutual Funds. You may want to find more about a mutual fund included in a college savings plan investment option. Additional information about a mutual fund is available in its prospectus, statement of additional information, and semiannual and annual report. Offering circulars for college savings plans often indicate how you can obtain these documents from the plan manager for no charge. You can also review these documents on the SEC’s EDGAR database. Investment Adviser Public Disclosure Website. Many college savings plans’ program managers are registered investment advisers. You can find more about investment advisers through the Investment Adviser Public Disclosure website. On the website, you can search for an investment adviser and view the Form ADV of the adviser. Form ADV contains information about an investment adviser and its business operations as well as disclosure about certain disciplinary events involving the adviser and its key personnel. Broker-Dealer Public Disclosure Website. You can find more about a broker through FINRA’s BrokerCheck website. On the website, you can search for any disciplinary sanctions against your broker, as well as information about his or her professional background and registration and licensing status. Other Online Resources. You can learn more about 529 plans and other college saving options on FINRA’s Smart Saving for College website. The website contains links to other helpful sites, including the College Savings Plan Network and the Internal Revenue Service’s Publication 970 (Tax Benefits for Higher Education). FINRA’s investor alert on 529 plans also provides valuable information for investors.

Short Answer: Parents should begin saving for each child's college degree the moment each child is born. Better yet, BEFORE each child is born. A little bit put away every paycheck can add up hugely over eighteen years. But if, like most people, you haven't done that, then you should begin saving as soon as possible. But there are other "savings" strategies that can help you save money in the long run. Detailed Answer: Ideally, you should be working with a financial adviser at your bank or an independent adviser to begin adopting long-term and short- term financial strategies. In addition, from 7th grade on, parents should be maximizing their child's academic scholarship opportunities, via tutoring, summer courses at the community college, etc. This may not sound like a savings strategy, but consider this: Upwards of 40% of students entering college are required to take remedial courses to ready them for meeting the rigor of traditional college coursework. These are courses for which you will be paying a huge amount of money, but these courses will not count towards credit and a degree. Worse, often these courses force students to take an extra semester or two to complete their degree, adding thousands and thousands of dollars to an already exorbitant expenditure. In addition, if your children are maximizing their academic opportunities, they have a greater chance of being offered precious scholarship money. Another "savings" strategy is encouraging -- or insisting -- on your child beginning their college education at the local community college, or living at home and attending classes at the nearest public university. I know, I know, this is a hard one for families, because kids want to get away from home, and parents want their kids out of the house. But the benefits of this option greatly outweigh the challenges. The benefits include: 1. Much, much, much lower cost of attendance, and no cost of room and board (costs that are also rising astronomically) 2. Save your money to contribute to grad school costs; an undergraduate degree is just the beginning; employers now expect to see grad school on a resume 3. Often a couple of years spent at the community college allows for the kind of maturity it takes to succeed in a four-year college; too often we see even the top students entering college who blow it completely, failing classes that have to be repeated (for extra cost) or getting poor grades that will affect their ability to move into the upper levels of their degree program in a timely manner (it also affects their ability to transfer to another college); this is where the new five-year norm enters the picture -- students now must expect to spend five years pursuing their college program instead of just four 4. By attending a college closer to home the first couple of years -- or all four years -- families save an enormous amount of money in travel, lodging, and meal costs. Often working with a college consultant can help you to make this argument to your child, because they will sometimes listen to the consultant before they will listen to the parent. And some of us with actual college experience understand curricula issues -- how a student needs to track academically to make the transition from high school, into college, and into the upper levels. Want to get an idea of how much EACH child's education will cost? This link will give you a good idea of how much you can expect to pay by the time your children enter college: http://www.finaid.org/calculators/costprojector.phtml.

529 Plans are one of the best ways for parents to help prepare and save for colleges. The tax benefits for 529 plans will benefit one's family. Go to www.savingforcollege.com and click on the 529 link to get started and learn more.

A little money can go a long way. As a parent or student set aside a portion of money each time a holiday or birthday comes around and your receive a gift. You will be surprised how quickly it can grow. Now, we all know this wont pay for all of your college education, so you really need a plan. As a parent, start as soon as you have kids in mind. Start setting aside money directly from your paycheck, so that you cannot access it. Look for investment options with tax benefits, such as a 529 or IRA. Do the math, and create a realistic plan for investment. As a family you need to have the discussion early on so you know how much you can set aside and how much will have to come in the form of tuition assistance.

Parents should begin saving for college as soon as possible. In no way is it recommended that parents utilize their retirement savings to cover the cost of college tuition. Building a savings plan for college is important and can definitely grow over time. It is best to work with a financial planner to best maximize your savings.

A 529 Plan is a college savings plan that provides its saver with tax advantages. There are two types of plans: Prepaid and College Savings Plan. All states throughout the US offer one type of plan and in addition, some individual colleges offer a prepaid tuition plan. A prepaid plan allows its saver to purchase credits/units for future tuition costs. It locks in tuition prices at eligible private and public colleges. The enrollment period for this plan is limited. A college savings plan permits its saver to open an account with their money and offers him or her various investment options. The tuition price is not locked in at either a private or public college. The enrollment period is open all year. It is recommended that the saver research their states 529 Plan option and/or speak to a financial advisor.

Parents and students alike should make monthly contributions to a savings plan. Encourage grandparents and others to forego expensive gifts with a combination of a modest gift and a contribution to a college fund.