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Comparing Various College Savings Plans
College expenses are expected to rise. In fact, by the time a child born this year reaches college age, tuition is expected to be three to four times greater than it is now. Families with children are already preparing for the inevitable by comparing various college savings plans and choosing the one that will best suit their needs.
Qualified Tuition Programs (QTPs), also called 529 funds, are the best way to save for your child's educational future. You may establish a 529 fund (named after the IRS 529 code) by pre-paying for your child's education, or by starting a college savings plan. The largest benefit to the pre-paid tuition is that the in-state college or university must lock in the rate of tuition based on the fees at the time of its inception. There are no guarantees with the college savings plan.
Every state in the country has some form of state 529 plan. Some states offer only the college savings plan, some states offer only the pre-paid plan, and a few states offer both plans. A group of private colleges are also offering national pre-paid tuition plans for private and independent colleges. This is known as the Independent 529 Plan.
The 529 pre-paid tuition plan was established to guarantee the savings will increase at the same rate as college tuition. If you purchase a year's worth of tuition today, it will be worth a year's worth of tuition when your child is ready to use it in ten years. The value will remain the same regardless of how much the tuition actually increases.
This plan allows a student's parent to lock in the tuition rate at the time they begin paying on the plan. It offers peace of mind and offers a higher rate of return on your investment than the other plans. There is no risk to the principal and are usually guaranteed by the state in which they were established. These plans are exempt from federal income tax, and often from state and local income taxes. If the student chooses not to attend college, or dies before attending, the plan can be transferred to another family member.
The 529 college savings plan differ in that they do not offer any guarantees on tuition rates when the child reaches college age. They are a tax-exempt saving plan earmarked for education, but they are subject to market upheavals. Because they are more risky, there is potential for a greater return on your investment. The plan is adaptive based on the age when the plan is started and how long it will take the student to enter college.
Anyone can contribute to a student's 529 plan, regardless of which plan the student has. Each state will have some limitations to their plans, so check with the state in which you live for their requirements. You may be able to make periodic withdrawals, but again, check with your state for specifics.
Besides the 529 Tuition plans, you may use the tried and true methods of savings bonds, putting money into traditional money market funds, or trust funds. Surely by comparing various college savings plans you will be able to find one that will meet your current financial and your child's future educational goals.
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