Saving for College Pt. 1

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Last time we talked about how to file independently on the FAFSA, because sometimes your parents’ money can hurt your grant situation.  In today’s post, we’ll take a look at the inverse:  saving today for your children’s college education tomorrow.

There’s a myriad of ways to go about this, so I’m going to split it into two posts.  Today we’ll look at 529 Plans and EE Bonds (or Educational Savings Bonds.)
529 Plans
There are two types of 529 plans, and they function in pretty different ways.  The first is a college savings plan. Your money is invested for you in the market, usually starting with aggressive (riskier) investments and spiraling into more conservative investments as your child gets closer to college age.  You can usually use these at any college/university nationwide, but because you’re putting your money into the market, it’s not guaranteed to come back.
The second kind of 529 plan is a pre-paid tuition plan.  The general idea is that you pay now for your child to go to college later.  So instead of paying 2028 tuition rates, you pay the 2012 price.  You cannot pay it in installments:  you have to pay in full.  These plans are usually not transferable outside the state you purchase them in, and sometimes are not transferable to more than one university.
Both kinds of plans are generally handled by each individual state.  Every state has at least one 529 option.  But you can purchase, for the most part, from anywhere.  MomVesting runs a great series on the specifics of 529 plans in different states.
Piggy Bank
College Savings Plans
Pros
  • child will have more of a choice of where they go to college as money is generally applicable to institutions nation-wide
  • can apply to things like room and board, books, and other college-related expenses
  • there are no age limits on these types of plans
  • can purchase in any state–regardless of residency
  • can enroll anytime
  • no taxes are applied to earnings on this type of account as long as the money you withdraw is used for school-related expenses
Cons
  • you are investing the money, so there is no guarantee of its growth or even that it will maintain its value
  • you will not lock in tuition prices as you will with a pre-paid tuition plan; all prices will be based on the time you enter…just like everyone else
  • there are usually fees associated with the broker you go through and sometimes annual maintenance fees
Pre-Paid Tuition Plans
Pros
  • you are locking in tuition prices, circumventing cost inflation that will inevitably happen if you wait to pay the institution when you child reaches maturity
  • the state you purchase the plan in will most likely insure it so your money will not lose any of its value
  • there are typically no fees beyond what a normal college student would pay
Cons
  • there are no returns or earnings on this type of account; you are saving money, not making it
  • there is usually an enrollment window
  • typically only apply to institutions in your state of residency, or even one, specific school
  • only applies to tuition and fees–not books and meal plans, although some plans allow you to purchase room and board
  • there is an age/grade limit on beneficiaries for most plans
Educational Savings Bonds
 
To purchase a bond, you used to have to go into your brick and mortar bank to pay and receive a slip of paper that showed your investment.  You would pay half of the face value and wait for it to mature.  This is no more.  Today EE series bonds are available only via the internet.  When you purchase one, you pay in full for its value.  It costs $50 to buy a $50 bond.  It accrues interest every six months, and the interest rate is based on the date of purchase.  For example, the current rate is 0.6%, and will be on all bonds purchased from November 2011 to April of 2012.  A new interest rate will be announced on May 1, which will apply to all bonds purchased through October.  Then a new interest rate will be announced in November, and so on every six months.  The only interest rate that matters is the rate that was set when you purchased.
Bonds will reach their full value in twenty years, but continue acquiring interest for thirty.
Pros
  • these bonds are a safe investment; they are guaranteed to make money, although at the current rate they may not be making you too much more than a savings account
  • earnings are tax-exempt as long as you meet income requirements and use the bonds for qualified, educational expenses
  • you don’t have to use the money for education; if the time arrives and your child has decided not to enter college, you can cash your bond for all earnings as long as you pay taxes on it
  • can use at any institution at any time, but note that you cannot cash them until after one year of purchase

Cons

  • because they are not a risky investment, the returns tend to be lower
  • when you cash them, you will have to file a joint return (if married) in order to claim the tax-exemption; this may or may not be a negative for you
To learn more about EE Savings Bonds, click here.
Come back tomorrow for Part 2 and other savings options!

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6 thoughts on “Saving for College Pt. 1

  1. femmefrugality

    Comment from one of my awesome readers left elsewhere…thought it may be helpful for you!!!:

    I love reading your blogs! You do such a good job. We opened a 529 account for our little guy and it’s great! Another great resource in Pnc bank if you have an acct with them they can help you set up a 529 acct if you want to go the route

    Reply
  2. Bobbi Burtch

    It’s great to know we have those options. Thank you for informing us! We also don’t have to be alone in choosing the best option; we can have someone to calculate our financea and expenses and gave us their professional insight regarding this matter.

    Bobbi Burtch

    Reply
  3. Allan Morais

    The 529 College Saving Plans do tend to be the more flexible option, albeit being riskier. Combine it with the ES bonds, and your child would be on their way to the college of their choosing, most likely without the burden of student loans!

    >> Allan

    Reply
  4. Kim

    Thank you for this breakdown. I’ve been interested in researching the 529 plan in my state (Virginia) and now, I will definitely look into all of our options. Our extended families have generously started their own investments and accounts for our son (a big benefit of being the only nephew and grandchild!) but we haven’t started our own yet. I had no idea there were so many options available.

    Reply
  5. Pingback: Moms on Money: Follow Up Tax Questions | Femme Frugality

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