March 5, 2009
Paying for college can be a struggle. Nobody wants to repay student loans forever, not everybody is going to land a full-tuition scholarship, and federal student financial aid seldom takes care of all college costs. If you're a parent or relative looking ahead to cover college costs for a child, finding scholarships is a great step now, but you may also want to consider college savings plans.
Read below for information on 529 savings plans, which are one of the most popular and diverse options for college savings. If this is not for you, check back tomorrow for more information on other savings options.
529 Savings Plans While 529 plans have sustained average losses of 21 percent in the last year, they can still be a good idea, especially if you choose your plan carefully and have plenty of time to save. Many 529 plans allow you to move your savings into a much more conservative portfolio when the student nears college, an option they're sure to publicize based on the recent behavior of the stock market. While there are limits on how many changes can be made to a 529 plan per year, the plans are otherwise quite flexible and varied, so it's easy to find one that works for your situation. Plus, 529 plans can be taken out in the parent's name, rather than the student's, so they will only minimally affect a student's financial aid eligibility.
Additionally, contribution limits are high, income limits are nonexistent, minimum contribution requirements tend to be low, and many states offer a variety of incentives for residents who contribute to their plans. As an added bonus, many 529 plans can accept contributions from anybody anywhere, not just the people named on the account, and several programs have been created to take advantage of this. For example, some plans allow a portion of credit card purchases or purchases at certain stores to go towards a particular student's 529 plan.
Prepaid Tuition Savings Plans If you're hesitant about sticking money for college in the stock market with uncertain returns, another type of 529 plan is also gaining popularity. Prepaid tuition plans allow families to contribute a fixed amount now in exchange for a certain portion of tuition being covered in the future. Many states do this for their state colleges and universities, and the Independent 529 plan, which is accepted by over 200 private colleges, also fixes contributions to portions of future tuition. Both of these varieties eliminate worries about tuition inflation, though if tuition actually goes down between now and when the student starts college, a prepaid plan might not be the most lucrative option.
The Down Side 529 plans do have drawbacks and limitations. Money must be spent on education, and the expenses that qualify are limited to undergraduate tuition, fees, educational expenses like books, and now computers. However, if the student is enrolled at least half-time, money from a 529 plan can also go towards room and board, so even if your student earns a full-tuition scholarship, it's possible to still take advantage of 529 savings. Money must stay in a plan for at least 3 years, so if you're saving for a college sophomore, you're out of luck with these. However, you can transfer the unused portion of a 529 plan to another family member without incurring the heavy withdrawal penalties, and it may also be possible to use the funds towards graduate or professional school.
Plans also vary from state to state, so your state's plan might not have the best benefits for you, or might not offer as sweet a deal in terms of tax breaks or low fees as the next state over offers its residents. Luckily, you can shop around among a variety of plans, including ones offered by several other states.
529 plans are not the only college saving option, though they remain the most popular and perhaps the most well-known. Check back tomorrow for information on the rest of the pack.
May 29, 2009
Today is May 29, also known as "529 College Savings Day," named after 529 plans, which are popular state-sponsored college savings plans. Today has been designated as a day to raise awareness of the importance of saving for college, as well as ways to do so. While 529 plans suffered along with everything else in the stock market, they are still being emphasized as a valuable tool for saving money for college.
According to a poll conducted by Gallup and Sallie Mae, 62 percent of families with college-bound children are already saving for college in some capacity, with the majority planning to contribute at least half of a child's tuition. About half of families that are saving already regularly contribute to college funds, and around a third use state 529 plans. The Chronicle of Higher Education has more information on the survey, as well as a link to the results.
If you're curious about college savings plans, we have some resources to help you get started. A few months ago, we did a couple blog posts on saving for college, featuring a discussion of 529 plans, as well as other savings options. While the focus of today is on saving for college, it's also a good time to look into college scholarships, especially for students still in high school. Read up on college savings accounts today, then do a free college scholarship search to find more options for paying for school.
September 25, 2009
Personal savings, college endowments and college savings plans all suffered when the stock market took a nose dive last fall. Students, families and even schools who thought they were financially secure soon learned otherwise and had to scramble to come up with alternative plans to pay bills. Now that things are beginning to even out and return to a state of normalcy, those affected by the recession are looking towards recovery and assessing their long-term plans. For some college savings plans, especially "guaranteed" tuition savings plans, the future looks particularly bleak, even without further financial setbacks.
Guaranteed tuition savings plans are one of several types of college savings plans, which allow families to save for college tax-free and often involve other incentives, as well. Prepaid tuition savings plans allow families to pay tuition ahead of time at certain schools, ensuring that bills will be paid for students, even if tuition skyrockets, as it seems likely to continue doing. Many families in states where they're offered have purchased them for young children who may not be attending college for another 15 years or more, but some plans have already begun to run out of money due to losses in the stock market and the sharp rise of college costs.
As a result, states including Texas, Alabama and Pennsylvania are struggling with the prospect of not being able to fund their current obligations to these plans. Several prepaid tuition plans have been closed off to new investors, including the plans in Texas and Alabama. Despite this, Alabama may not have enough money to pay tuition for all students currently enrolled in its prepaid plan. Pennsylvania has introduced legislation to remove "guaranteed" from its tuition savings plan's name and make it clear that the state has no obligation to bail out the plan if it doesn't earn enough money to meet its obligations.
Texas has also announced a rule change for people who currently have money invested in its guaranteed tuiton plan. When they invested, families were told that if their children did not go to one of the state colleges whose tuition the plan will fully fund, they would be able to close their account and withdraw the full amount of tuition at those institutions at that time. Now, the Texas Prepaid Higher Education Tuition Board has said that families whose children do not attend one of the schools included in the plan can only withdraw the amount they invested, minus an administrative fee. State legislators have urged the board to reconsider, but so far it appears that those with money invested have three choices: they can pull their money out before the rule goes into effect on October 30, they can limit their children's college choices to those sanctioned by the tuition savings plan, or they can take a guaranteed loss on their "guaranteed" tuition investment.
To help you avoid the problems currently facing Texas parents, US News has a helpful article on questions to ask before investing in a prepaid college savings plan. Prepaid tuition plans, 529 plans, and other college savings vehicles can still be a good idea, even though they've been through difficult times. As with many things, the trick to being successful in your choice is first doing your research and figure out which plan is best for you and your family.
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