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College Savings Plan Explained

From Center for Online Education

COE
http://www.onlinecolleges.net/

An aggregate, college tuition has risen an astonishing 79.5% in the last decade ― nearly twice the growth rate of medical care during the same period and almost three times the increase of the general consumer price index. Textbook prices have also increased by a similar margin between 2003-04 and 2013-14. According to CollegeBoard, the average undergraduate in the United States paid the following tuition and fees during the 2013-14 year:

  • Public two-year (in-state): $10,730
  • Public four-year (in-state): $18,391
  • Public four-year (out-of-state): $31,701
  • Private nonprofit four-year: $40,917
  • For-profit (tuition only): $15,130

In order to afford such high costs, prospective students and their parents need to begin a manageable college savings plan. Before we discuss the details of the different savings vehicles available to parents, there are a few important college saving tips to keep in mind:

  • College savings accounts can be opened before a child is a born. If you are planning on growing your family, it is never too early to start thinking about college.
  • Families with multiple children should open separate accounts for each child
  • Experts recommend saving at least $400 per month to from birth through graduation to be able to comfortably afford all college expenses.
  • You don’t have to choose one type of account; you can mix and match them in a way that suits your income level.
  • Don’t be afraid to ask family and friends to gift money into these accounts in lieu of other presents on special occasions.

Saving for college can feel overwhelming, especially with all the different options to choose from. Here, we’ll discuss the best plans for families who would like to start saving for higher education. Remember, the only poor choice you can make when it comes to thinking about college tuition is not saving at all.

529 College Savings Plan

529 plans are highly popular and often recommended by financial advisors. Also known as a “qualified tuition plan,” they offer four major benefits:

  • The ability to control the account and change the beneficiary
  • Earning are tax-deferred
  • Distributions used for educational expenses are exempt from federal income tax
  • Income and investment restrictions are non-existent

The Securities & Exchange Commission notes that two 529 account types are available: a prepaid tuition plan and a college savings plan. According to FinAid.org, all 50 states (and the District of Columbia) make college savings plans available to legal residents. Prepaid plans are available in 16 states.

The Prepaid Tuition Plan

  • Account holders can buy credit units for future use in paying tuition and administrative fees (along with room and board, in some cases)
  • Students pay tuition at a fixed rate determined at the time of the initial investment, meaning rates will be protected from future inflation
  • The state guarantees the plan to help mitigate risk

The College Savings Plan

  • There is no age or grade limit, nor is there a state residency requirement, which allows students and parents to consider a greater number of plans
  • Generally no enrollment period
  • Tuition prices aren’t locked in and the state assumes no responsibility for account funds if the market underperforms, making these plans slightly riskier

Access to a 529 savings plan may affect the beneficiary’s eligibility for need-based financial aid. On the Free Application for Federal Student Aid, both 529 options are treated as ‘parental assets’ and included in the household’s ‘expected family contribution’ for college expenses.

Where and how you enroll in a prepaid tuition or college savings plan will depend on your state of residence. Please visit FinAid.org or Morningstar to view state-specific lists of all available 529 plans.

Coverdell Education Savings Account (ESA)

Coverdell Education Savings Account (ESA) is another vehicle designed specifically for college savings. Single parents who earn an adjusted gross income of $110,000 or less per year ― or two parents jointly filing who earn $220,000 or less ― may obtain a Coverdell ESA for their child. In any given year, the contributions toward this account may not exceed $2,000; if multiple accounts have been opened for the same beneficiary, then combined contributions must not exceed this amount. Additionally, beneficiaries must be younger than 18 (exceptions may be granted for disabled or special needs learners). Coverdell ESA plans may be used to fund private elementary or secondary educational expenses, as well as collegiate costs.

Unlike the 529, Coverdell ESA plans are not tax-deductible. However, the funds will stay interest-free until the beneficiary is allowed to access them.According to the IRS, funds from a Coverdell ESA can be used at “virtually all accredited public, nonprofit and proprietary (privately owned profit-making) postsecondary institutions.” If there are funds remaining in the account by the time the beneficiary turns 30, in most cases, these funds must then be distributed no more than 30 days later.

If the student is also the official account-holder and considered financially independent from their parents, then a Coverdell ESA may impact eligibility for federal financial aid. However, if the student is considered a financial dependent or the student’s parents are the registered account-holders, then the Coverdell ESA will not significantly affect eligibility for need-based federal aid.

To learn more about the Coverdell ESA, please review IRS Publication 970. You can enroll in this savings plan through different financial brokers. Major Coverdell ESA providers include TD Ameritrade, Scottrade, E-Trade, Schwab, TradeKing and Capital One 360 Sharebuilder.

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