Military members have some additional options when it comes to saving for college. In this week’s Finance Friday post, Jennifer breaks 5 options down for us.
Saving for College
by Jennifer Wake
Congratulations on adding to your family. In the initial afterglow of birth comes the day to day raising of this precious baby. Days will pass quickly and before you know it, they will be entering high school and thinking of college or post-high school education. Eighteen years can pass in the blink of an eye. Unfortunately the cost of college keeps going up and time waits for no man.
In approximately 220 months after birth most children will enter college or start on a post secondary education degree of some type. Only 220 months… with the average cost of college currently around $30,000 a year, you have to save $545 per month per child. Not really, it is actually about $730 per month because the cost of college is rising faster than most investments.
How much you save for college is important but how you save it will impact financial aid in the future.
There are many different ways to save for college.
First is a plain savings account at a bank in the child’s name.
You will have control for a while, but it is in their name so when they turn 18 they can do whatever they want with that money. It is at a bank so it is earning very little interest and you are actually losing ground on saving for college.
Second, you could open a 529 college savings plan.
These are state run plans. Each state and the District of Columbia have their own plan or plans. (Washington State only offers pre-paid tuition and Wyoming uses Colorado’s plans). These plans come in two styles. The first is a pre-paid tuition plan. You pay for the tuition for an in-state public college at today’s rates. This type of plan used to force you to choose the college your child attended.
If your child chooses not to attend that college you can move it into the college savings plan. The 529 college savings plan allows you to invest non-deductible money into mutual funds. Earnings grow tax-deferred and are tax-free if used for qualified education expenses. Qualified expenses include tuition, fees, books, supplies, equipment, special needs, room and board for minimum half-time students.
These plans can be transferred to another person (i.e. your first child gets a full scholarship you can transfer their 529 to a sibling or a cousin). Yearly cap for contributions is $15,000 per child. Grandparents or other adults can also contribute up to $15,000 per child. You do not have to be a resident of a state to choose their 529 plan.
Third, you could open a Coverdell Education Savings Account (ESA).
You can use ESAs for higher education or private education K-12. The yearly cap for contributions is $2,000 per child from all sources, such as grandparents or other adults. The student can use it for tuition, fees, books, supplies, equipment, special needs; room and board for minimum half-time students; additional categories of K-12 expenses. It is transferable but must be used by age 30. Contributions are allowed until age 18.
A fourth option is opening a UTMA/UGMA.
UTMA/UGMA stand for Uniformed Transfer (Gift) to Minor Act, the difference between them is the type of assets. UGMA can hold only money and securities while the UTMA can have other types of property (i.e. real estate). A parent, grandparent or other adult is custodian for the account and makes all the investment decisions until the child for whom the account was opened reaches the age of 18. Then, the child controls the investment. This is considered the child’s asset so this will impact financial aid greatly. You cannot transfer these types of accounts between beneficiaries. So if your child receives a great scholarship, you cannot give this money to another student who did not receive scholarship monies. $950 in earnings are tax-free. The next $950 in earnings is taxed at the child’s rate with the earnings over $1,900 being taxed at the parent’s tax rate.
Fifth, you can buy savings bonds.
These bonds come with many restrictions and rules. They do not grow as fast as many investments. The Bureau of Public Debt can provide most answers about the use of savings bonds
As you look to the future, planning is key to success in the financial arena.
The website saveandinvest.org had a wonderful chart summarizing your choices. On their website is a good pamphlet called “Smart Savings for College—Buy Better Degrees” which you can download (PDF format) If you decide to go with a 529 plan you can go to savingforcollege.com and find tools to compare plans between states.