College Savings Plans and Education Funding

Planning Strategies for College

The cost of a college degree continues to trend upward, year after year. As a result, prospective students who have not done adequate college planning are behind the 8 ball out of the gate.

However, the benefit of a college education can not be understated.

According to the U.S. Census Bureau, in the year 2007, the average male college graduate, aged 25-34, earned close to 60 percent more than the average male who completed only high school or had a General Education Development (GED) certificate. Among women the same age, college graduates earned almost 80 percent more than non-graduates!

As a result, saving for college should be started early, and treated as a metholodical expense. Keep in mind, over a lifetime, the additional earnings resulting from this “investment” in education could easily end up in over $1,000,000 in added salaries and benefits over your working career.

That leads us to the question, “How do I save for College?” or “What is the best method of funding my higher education?”

College Funding Options

Pay as You Go

You can always work your way through school, as millions have done before. However, one must be careful not to take away from their education as a result.

Pay Later

Some might suggest that you approach college tuition as you would when you finance a home – take out a loan to pay for college and simply repay the debt after graduation. One has to be very aware that you can run up a substantial bill, and may end up paying them for a long, long time.

Find Someone to Help Pay

Here is the perfect world scenario, as scholarships and grants are the ideal financial aid. They don’t have to be paid back. But according to the College Board, less then 21% of all federal financial aid comes from scholarships and grants, while over 67% is loans (The rest is federal work-study and the value of education tax benefits.)*

Save Now for More Freedom and More Choice Later

Saving now is the best way to ensure that you have options later. After all, you would like to select a college that offers the best education and not be dependent of financial aid when making your choice.

Funding Vehicles for College

Many strategies and investment vehicles are available to help you maximize your college savings. Selecting a suitable strategy and the best combination of investment vehicles is critical. For each option, you face the task of evaluating key characteristics including:

The potential for growth

Risk of loss

Tax implications

Ownership and control

Ease of management

Fees and expenses

529 Plans are typically the best way to save.

Types of 529 plans

529 plans are usually categorized as either prepaid or savings plans.

Savings Plans work much like a 401K or IRA by investing your contributions in mutual funds or similar investments. The plan will offer you several investment options from which to choose. Your account will go up or down in value based on the performance of the particular option you select.

Prepaid Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Independent 529 Plan is a separate prepaid plan for private colleges.

Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the private-college Independent 529 Plan is the only institution-sponsored 529 plan thus far).

Coverdell Savings Accounts

Coverdell education savings account became a very attractive college savings vehicle for many people, including families that wish to save for elementary and secondary school expenses as certain K-12 expenses were added to the list of qualified expenses. In fact, even if you like the 529 plan you may still decide to contribute the first $2,000 of savings for each child into a Coverdell account.