As the cost of a college education continues to rise, outpacing the rate of inflation, it is becoming beyond the reach of most people unless they have planned early on.  For people starting a college savings plan today, questions arise as to the best way to save.  For such an important and long term goal, it pays to do some research when selecting a plan.

There are many factors to consider when selecting a college savings plan. As with any savings goal, individual factors such as time horizon, risk tolerance, investment preferences and tax situation need to be considered and weighed in order to select the most suitable savings plan.  In addition, special consideration needs to be given to who will actually own the college funds as the decision is likely to impact the availability of financial aid in the future.

Traditional Savings Methods

College savers can opt for the more traditional methods of accumulating college funds such as savings accounts (CDs, money market funds), tax-free municipal bonds, U.S. Treasury securities, or mutual funds.  If the time horizon is long, savers may be able to afford the higher risk of investing in vehicles that offer potentially higher returns. As the time horizon shortens, they could gradually move their funds into more conservative savings of investments.

Tax Advantaged Methods

As an incentive for families to start early with their own college savings plans, the federal tax laws provide for tax advantaged methods to pay for college expenses. The methods involve different tax rules so they can be somewhat complicated. The best approach is to seek the guidance of a qualified tax or financial professional to help determine which method is most suitable.

IRC Sec. 529 Qualified Tuition Plans

These plans are designed to help a family cover the cost of college by taking advantage of tax incentives provided through the federal tax code.  The plans may vary between the individual states and educational institutions that offer them. Contributions are not tax deductible, however, the accumulation is not subject to current taxes. Also, if certain requirements are met, the distributions that pay for qualified higher education expenses are not taxable.  Qualified expenses include tuition, fees, room and board, books, and other supplies needed to attend an institution of higher education.  A 10-percent federal penalty on earnings will apply if you receive a non-qualified withdrawal.

There are two main types of 529 Plans: a pre-paid tuition plan, and a college savings plan. Pre-paid tuition plans involve purchasing units or credits at participating educational institutions that can apply to tuition and, in some cases, living expenses. Participation in a prepaid tuition program does not guarantee a child will be accepted into a university or school.  Most are sponsored by state governments and have residency requirements.

College savings plans establish an account for a student that can be used to pay eligible college expenses. Many 529 College Savings Plans offer a choice of investments including mutual funds, money market funds and fixed investment.

For more complete information about the 529 savings plan, including investment objectives, risks, fees, and expenses associated with it, please read the issuer's official statement.  The issuer’s official statement can be obtained from your financial advisor.  Please read it carefully before investing.  Before investing, please consider whether your home state offers any state tax or other benefits that are only available for investments in your state's qualified tuition program.  Other benefits may include reduced or waived program fees, matching grants, and scholarships to state colleges.  Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision.  You should consult with your financial, tax or other advisor to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances and you also may wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state's 529 college savings plan. 

 Investments in the 529 College Savings Plan are subject to market risk and there is no guarantee that funds will be sufficient to cover all college costs. It is important to carefully consider how to invest in a 529 Plan, since it can impact a student’s eligibility to participate in need-based financial aid programs.

Financial Aid

When saving for college, special consideration should be given to future eligibility for financial aid.  Most needs based financial aid programs base eligibility on the amount of assets that are owned by the child. Generally, assets that are owned by the parents are not considered for financial aid eligibility.  If assets are held in the child’s name, or in a trust for the child, they could negatively impact eligibility.

Working together, we can examine college investment options to build a customized portfolio that takes into consideration your financial goals,  risk tolerance and timeline. Contact us today to find out more.