About Children's College Funds
Establishing a college fund for your children is one of the most important things you can do for their future. Before you make those important allocations, however, you must understand the different types of savings vehicles, the best plan for your geographic location, any misconceptions, and considerations.
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Types
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There are many different ways to save for your child's college. There are four, however, that are the most common methods: 529 plans, retirement accounts, U.S. Treasury Savings bonds and College IRA's. The 529 plan is, by far, the most popular option. Your contributions, many times, are tax deductible, the earnings are tax free and withdrawals are also tax free. Saving for college with a retirement account typically allows you to take withdrawals without penalty. The other option is to take a loan from yourself. This way, you pay yourself back in interest. U.S. Treasury savings bonds were more popular years ago, when interest rates were higher. Although they yield a guaranteed percentage each year, it is typically quite low. College IRA accounts, or Coverdell Education Savings Accounts have an annual maximum contribution limit. The deposits you make are not tax deductible, but your earnings do accumulate tax free.
Geography
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There are many different 529 plans across the country. In fact, each state has their own 529 plan, as well as several private plans. The resources section provides a link to find each individual state's 529 plan. Some state sponsored plans allow residents of other states to participate. Some, like Rhode Island, only allow local resident participation. Different 529 plans perform better or worse than others. Some state plans may offer tax deductions for contributions, but still have lower performance. It is best to search for the most well-rounded 529 plan.
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Considerations
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Whether you're saving for college or paying a monthly student loan bill, you need to adjust your budget. Never underestimate,however, the power of saving over borrowing. You actually end up paying about twice as much money if you forgo saving and resort to borrowing for college. For every dollar you save, that is $2 you won't have to borrow in the future.
Misconceptions
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Many people believe that saving money for college hurts their chances of obtaining government assistance and student loans. In fact, in the case of 529 plans, only a small portion actually counts toward your family's net worth. It is better to save money now than borrow it in the future, anyway. Another misconception parents have is that scholarships will save the day. In fact, on average, scholarships have only about 10 percent impact on tuition costs. Although about 80 percent of parents believe their children will receive scholarships, only about 7 percent actually receive those private scholarships.
Expert Insight
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There are some terrific 529 plans available. Financial experts, however, rank these plans and determine the best. No matter in which state you live, there are currently four college savings 529 plans that stand out from the pack: College Savings Plan of Nebraska,The University of Alaska College Savings Plan , Education Savings Trust in Virginia and the The Vanguard 529 Savings Plan in Nevada. Not only are the rates of return some of the highest in the country, they also provide the lowest fees available.
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