College Plans 101
It's hard to imagine our little ones leaving us for college one day, but of course we want the best for them. The earlier we plan for this day ( emotionally and financially) the better off your family's finances will be when it comes time to choose the school. Below I've listed the various college savings options, and remember, some vary by state.
Before we get started,the first step is to figure out what your goal is. What was your experience with college? Do you want your child to have a similar experience or something different? Some parents may just want to provide tuition, their child can work during college to provide housing expenses, food, entertainment etc. Some of us don't want our kids to work and want to provide the entire cost. Some of us would like to provide an option of state OR private school, which is a big difference in cost. Sooo, before you look into college plans, figure out what you'd like to realistically provide your child for his/her college experience.
A good reference to figure out the cost of college is the schools website, for example, the University of Florida estimates that an in state resident living on/off campus will pay $18,830 per year for undergraduate in 2010-2011. That includes tuition, books, computer, housing, food, transportation, clothing/maintenance and health insurance. So if I have a child that is a newborn, then I need to figure out the future cost 18 years from now of 4 years of school and how much I need to start putting away each month/year to cover those future costs.To do this, use a college cost calculator or consult a financial advisor. Once I have that figure and have committed out of my budget towards that savings goal, here are my options for where I should save my childs college dollars:
529 plans:
Basics: You save each year into the plan and the money is invested into mutual funds.
Pros:
1)The money goes in after tax, and when you withdraw the money, it comes out tax free when used for your childs higher education ( similar to a Roth IRA) Note* higher education is undergraduate, graduate, medical school etc. NOT private elementary or high school
2)You have the potential to invest and grow your money as conservatively or aggressively as you choose. If you don't feel like you are a saavy investor, you can choose age based portfolios that become more convservative as your child gets closer to college.
3) The money is used for higher education- tuition, books, computer costs. The money can not be used for non education expenses- ie a new car, sorority fees, your baby's bar tab!!
4) Parent maintains control over the money and names the child as the beneficiary, and the beneficiary can be changed any time. For example, if the account was set up for Johnny who ends up not going to college, it can be transferred to Johnny's sister for her college
5) Since it is considered a parents asset,it is more beneficial in the financial aid calculation. Bonus- if a grandparent or other relative sets up the account, it is not figured into the financial aid calculation at all!!
Cons:
1) can only invest in mutual funds ( not stocks, cds, etc.) You can set up one through a direct sold plan with your state or through an advisor sold plan through your financial advisor, the advisor sold plan is more expensive in terms of fees, but thats because you have a broker advising you on how to invest the money
2) The money is used for higher education- tuition, books, computer costs. The money can not be used for non education expenses- ie a new car, sorority fees, your babys bar tab. If you want complete flexibility with the money, then this can be a CON instead of a PRO
3) if your child never goes to school, you can take the money back and use it for your retirement, however there is a 10% penalty on whatever you withdraw
4) investment risk- you can lose money in your portfolio depending on your investment strategy
Here are some websites to learn more about 529 plans and how to set them up:
It's hard to imagine our little ones leaving us for college one day, but of course we want the best for them. The earlier we plan for this day ( emotionally and financially) the better off your family's finances will be when it comes time to choose the school. Below I've listed the various college savings options, and remember, some vary by state.
Before we get started,the first step is to figure out what your goal is. What was your experience with college? Do you want your child to have a similar experience or something different? Some parents may just want to provide tuition, their child can work during college to provide housing expenses, food, entertainment etc. Some of us don't want our kids to work and want to provide the entire cost. Some of us would like to provide an option of state OR private school, which is a big difference in cost. Sooo, before you look into college plans, figure out what you'd like to realistically provide your child for his/her college experience.
A good reference to figure out the cost of college is the schools website, for example, the University of Florida estimates that an in state resident living on/off campus will pay $18,830 per year for undergraduate in 2010-2011. That includes tuition, books, computer, housing, food, transportation, clothing/maintenance and health insurance. So if I have a child that is a newborn, then I need to figure out the future cost 18 years from now of 4 years of school and how much I need to start putting away each month/year to cover those future costs.To do this, use a college cost calculator or consult a financial advisor. Once I have that figure and have committed out of my budget towards that savings goal, here are my options for where I should save my childs college dollars:
529 plans:
Basics: You save each year into the plan and the money is invested into mutual funds.
Pros:
1)The money goes in after tax, and when you withdraw the money, it comes out tax free when used for your childs higher education ( similar to a Roth IRA) Note* higher education is undergraduate, graduate, medical school etc. NOT private elementary or high school
2)You have the potential to invest and grow your money as conservatively or aggressively as you choose. If you don't feel like you are a saavy investor, you can choose age based portfolios that become more convservative as your child gets closer to college.
3) The money is used for higher education- tuition, books, computer costs. The money can not be used for non education expenses- ie a new car, sorority fees, your baby's bar tab!!
4) Parent maintains control over the money and names the child as the beneficiary, and the beneficiary can be changed any time. For example, if the account was set up for Johnny who ends up not going to college, it can be transferred to Johnny's sister for her college
5) Since it is considered a parents asset,it is more beneficial in the financial aid calculation. Bonus- if a grandparent or other relative sets up the account, it is not figured into the financial aid calculation at all!!
Cons:
1) can only invest in mutual funds ( not stocks, cds, etc.) You can set up one through a direct sold plan with your state or through an advisor sold plan through your financial advisor, the advisor sold plan is more expensive in terms of fees, but thats because you have a broker advising you on how to invest the money
2) The money is used for higher education- tuition, books, computer costs. The money can not be used for non education expenses- ie a new car, sorority fees, your babys bar tab. If you want complete flexibility with the money, then this can be a CON instead of a PRO
3) if your child never goes to school, you can take the money back and use it for your retirement, however there is a 10% penalty on whatever you withdraw
4) investment risk- you can lose money in your portfolio depending on your investment strategy
Here are some websites to learn more about 529 plans and how to set them up:
PS if you live in a state that has state income tax, you want to set up a 529 plan based in your state, so you can receive a state income tax deduction. If you don't live in a state that has income tax, then it does not matter. For example, I live in Florida where we do not have state tax, so I can open a Fidelity 529 plan, which Fidelity's plan is out of New Hampshire.
United Transfer to Minors Account: this is also an account that is set up for your child that you invest in each month, it is usually a brokerage account set up at a brokerage firm ( Ameriprise, Etrade, Scottrade etc.) or a bank ( Suntrust, BankofAmerica etc. )
Pros:
1) investment flexibiliy- you can invest in anything you want ie stocks ( for ex. you can buy that Disney stock you were considering for your baby), stock options, mutual funds, CD's, money market etc.
2) there is no limit to how much money you can invest into the account each year
3) flexibility- the money can be used for anything that is of benefit to the child- so it can be used for any college cost, it can be used for secondary school, summer camp etc. as long as it was of benefit to the child
4) if there is money left in the account at the end of college, the child can use that money for a new car after college, a downpayment on a home, a wedding etc.
5) great way to teach a child the value of money- by either getting him involved in understanding how the money is invested or budgeting his college smartly so he can have money left over for after college. For example, my husbands parents had a UTMA account for him and he learned his first lessons on how stocks work and then took ownership of budgeting his college expenses so he would have money left over. We still have funds in his UTMA account that we can use right now as an emergency fund or a downpayment on our next house.
Cons:
1) it is an irrevokable gift to the child- it can not be used later for your retirement or anything that is not of benefit to the child
2) parent loses control over the account when the child reaches 18 or 21 years of age ( depending on the state you live in). So if Johnny learns he has $100,000 in an account and he is of age, he could withdraw it all and take off for Europe!
3) the earnings, interest, capital gains and dividends are taxed every year- there is a kiddie tax rate and then the amount over that is taxed at the parents tax rate
4) since the money is considered a child's asset- it can negatively effect an application for financial aid
PrePaid College Plans- you are investing into your state plan that you are purchasing the cost of college at today's rates
Pros:
1) you lock in the cost of college at today's rates
2) flexible payment plan, most states you can pay through a one time lump sum,a 5 year payment plan or a plan that you pay for until they are ready for school
3) you can prepurchase the cost of tuition as well as the cost of on campus housing
4) no investment risk- you do not have to worry about your portfolio going up or down because it is not invested in anything
5) if they don't go to school, you can receive your money back, less a transaction fee
6) if your child receives a scholarship for tuition, you can also receive your money back
7) most states have recipricosity- if you buy a plan in Florida, but they go to school in Tennessee, you can transfer it to the Tennessee plan
Cons:
1) the plan does not cover all of the other expenses of college- often times the tuition is only 1/3 of the total cost of college. It's the off campus housing, food, entertainment, spring breaks, sorority/fraternity costs which really add up, that the plan does not cover
2) you get your money back if your baby doesn't use it or receives a scholarship- so if you invest $15,000 when they are a baby, 18 years later you get $15,000 back ( less the processing fee) with NO interest
3) the recipricosity might not be equal- for ex, Florida's prepaid program may only cover 1/2 the cost of Tennessees college, if Tennessee is a more expensive state ( since your child is not a resident)
4) the housing option is only ON CAMPUS- so depending on the school, some students don't live on campus or only do it for the 1st year, so if you are considering this option, consider only doing the 1st year
Websites to learn more about Prepaid College:
Just google "your state and prepaid college plans", florida's plan is here
There are a few other options, like a Coverdell Savings account, using CashValue Life Insurance or EE savings bonds, but I've outlined the most common options above. Keep in mind, you don't have to do one plan, you can combine several of the plans if one plan is not fitting all of your goals!
If you find this info.to be overwhelming, don't worry, there are financial advisors out there that have the knowledge and tools to help you navigate through all of this info. and find the best plan for you and your family. Go to www.cfp.net to find a qualified financial advisor in your area.
My last words of wisdom on this topic:
1) Don't procrastinate!! the longer you wait, the more you will have to save each year. Look at reducing costs now that can produce some savings, remember your baby won't remember that cute onesie or if they have 5 different bathing suits for the summer, they will remember when it comes time to going to college if their options are limited.
2) there are other options for college- student loans, scholarships and financial aid. If you have a very tight budget, I recommend saving for your retirement over college savings, since there is no such thing as scholarships, financial aid or student loans for your retirement!
PS Go Gators!!
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