Most people would say they want their children to excel in life; after all it is human nature to want to see your children succeed. Given today’s standards, we often consider someone successful if they have a stable career, and a college education is a valuable component in that process. Chances are most parents would say they are not where they want to be when it comes to saving for their child’s college education. Combine both the lack of savings for college education with the elevated costs of college tuition and you have a recipe for disaster that can lead to our children either not going to college or graduating with a degree and being burdened with student loans. This article will cover a few of the industry standard options available that can help parents in their financial planning for college. Education Savings Bonds: This is the classic way of saving. When I was growing up, my parents would give me these savings bonds for Christmas and I hated it. I would have preferred the money instead, and at that time I could not foresee I would cash them in years later and pay for books, which then freed me up to spend my money on a laptop. There are currently two different savings bonds, EE series and I series, both of which can be purchased online at www.Treasurydirect.gov. The main difference between the two bonds is an inflation adjustment. The EE bonds earn a fixed rate of interest that accrues for a maximum of 30 years. The I bonds earn a fixed rate of interest plus an additional interest rate that is tied to the current inflation rate. Both bonds can be cashed and their earnings excluded from income taxation-subject to some income limits if used for tuition and fees only. Other expenses such as room and board, textbooks, and supplies are not allowed. The maximum amounts of bonds that can be purchased in 2013 are $10,000 Series EE bonds and $10,000 I bonds.
State Sponsored 529 Plans: This plan has been getting a lot of attention since its inception, and is also known as a qualified tuition program. Every state has their own individual plan that allows family members to contribute funds that can grow tax deferred and be withdrawn in the future for qualified educational expenses. These expenses include tuition and fees, books and other educational supplies. Room and board can be a qualified expense if the student attends at least half time. The maximum contribution to this type of account is $370,000. Parents/Grandparents can each contribute $14,000 per year and still stay under the gift tax annual exclusion. There is also an option for a one-year contribution per child totaling $70,000 by electing to treat it as a 5-year gift! 529 plans have a lot of flexible options when it comes to management, such as self-managing the plan or having it managed by a professional. You can open a 529 plan at most financial institutions and typically their cost structure is very reasonable. An additional important fact is that these accounts can be used for public and private college and are not limited to just the state of origination. For example, an account opened in Texas can be used for private college expenses in New York. However, one warning to keep in mind: if funds are withdrawn and not used for educational purposes, the account owner will be subject to federal income as well as a federal penalty equal to 10%.
Prepaid Tuition Plans: Texas offers a prepaid tuition program, but this type of plan is state specific and is not offered by all states. This plan effectively allows you the option to pay for college tuition for your children at today’s prices. Within that formula, you have the option to purchase a range of credits to be applied to the child’s education within Texas. For example, 100 credits is equivalent to a full 30 hour year. You could choose to buy only 50 credits in the current year, which would translate into one semester for your child. There are three levels of unit purchasing, each with different prices from highest to lowest: 1. highest cost of public college, 2. average cost and 3. average of two year college. The Texas program is flexible and allows you to choose an array of payment terms, ranging from paying all in one year to spreading the payments over the child’s educational years. The prepaid tuition plan locks in the cost of college in today’s dollars and if the credits are unused, they can be transferred to another beneficiary.
The options listed above are just a few of many that are available. I have often heard the following from clients: Where does one start? And how do I know which plan is right? The answer is start your research online. The plans discussed above can be set-up in as little as 15 minutes with an online application. Savings Bonds can be purchased online or can be ordered at your local bank. 529 plans can be opened at financial institutions such as Charles Schwab or Vanguard, or you can open one at your local credit union. Prepaid Tuition Plans are purchased through the state website. Picking the right plan is a difficult choice because of the unknown that the future holds and the unique circumstances of each family. Each plan is unique and you can’t go wrong choosing any of them. If you have the financial capability, you can elect to sign up for all of them and fund each of them individually. Whatever decision you decide to make, the key is to make a choice and start now, as getting started tends to be the biggest hurdle in preparing for your child’s future educational expenses.