Be Smart: Save For College

Each month I sift through my bills and wonder when I’ll stop receiving a statement from my student loan lender. When I graduated from college, I looked ahead to my future feeling confident. Then reality hit. I realized that I had thousands of dollars to pay back for my education. How would I pay it? How could I live with this debt? Would my children be heading off to college when I finally paid it off?

It’s sad to say, but I know I let that debt hold me back from making certain decisions and going different places. My dream is to make sure my daughter doesn’t have the same hefty debt hanging over her head when she begins her journey into the “real world.” It seems slightly ridiculous to think about this now when my daughter isn’t even a year old, but now 529 plans offer a way to invest for college early on a tax-free basis. Similar to how 401(k) plans help families save for retirement, 529 plans can help you save for higher education.

529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan.
You can choose from two types of plans, a pre-paid tuition plan or a college savings plan. Here are the major differences.

Pre-paid Tuition:

• Locks in tuition prices at eligible public and private colleges and universities
• All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room and board option or use excess tuition credits for other qualified expenses.
• Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased.
• Many state plans guaranteed or backed by state.
• Most plans have age/grade limit for beneficiary.
• Most state plans require either owner or beneficiary of plan to be a state resident.
• Most plans have limited enrollment periods.

College Savings Plan:

• No lock on college costs.
• Covers all “qualified higher education expenses,” including: tuition, room and board, mandatory fees, books and computers.
• Many plans have contribution limits in excess of $200,000.
• No state guarantee. Most investment options are subject to market risk. Your investment options are subject to market risk. Your investment may make no profit or even decline in value.
• No age limits. Open to adults and children.
• No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.
• Enrollment open all year.

In addition to the funds that you may directly invest in a 529 plan, you can also invest your Upromise savings. Upromise allows you to register credit cards, grocery cards and drugstore cards so that you can receive money back towards college savings. Upromise makes it easy to automatically invest the available balance in your Upromise account in a 529 plan, subject to the minimum investment amount. (Tim did a short write up on Upromise here).

To find out more information on 529 plans available in your state visit www.sec.gov/investor/pubs/intro529.htm, www.collegesavings.org or www.savingforcollege.com.