Movies and advertisements may show beaming college graduates tossing their caps in the air while their proud parents look on. While every parent eagerly looks forward to a day like this, the reality is that this may have come with a heavy price tag. Newscasts constantly trumpet almost continuing increases in college tuition while beleaguered parents wonder how they will possibly be able to send their student to college. But there is help in saving for college. For the savvy parent (and student) eager to defray the cost of college and prevent the student from having to graduate college with smothering student loans, here are some expert tips for saving for college.
Experts recommend the number one vehicle for college savings is using a section 529 plan. Participation in section 529 plans is growing at an extremely rapid pace. . In 2000 a total of $2.6 billion was invested in the plans. This grew to $14 billion in 2001 and more than $92 billion in mid-2006. Many financial aid analysts predict that there will be a total of $175 billion to $250 billion invested in 10 million to 15 million accounts by the year 2010.
This is due to the flexibility of this type of plan. Section 529 college savings plans are tax-exempt college savings vehicles with a very low impact on need-based financial aid eligibility. Parents need to be advised though that there is no lock on tuition rates and no guarantee. Investments are subject to current market conditions, and the savings may not be sufficient to cover all college costs. However, with this added risk comes the opportunity for potentially earning greater returns.
Experts also recommend looking into prepaid tuition plans. These plans are college savings plans that are guaranteed to increase in value at the same rate as college tuition. For example, if a family purchases shares worth half a year’s tuition at a particular college, these shares will always be worth half a year’s tuition, even when 10 years later, the tuition rates may have doubled. The main benefit of prepaid tuition plans is that they allow a student’s parents to lock in tuition at current rates, thus offering peace of mind. The plans’ simplicity is also attractive and most offer a better rate of return on any level of investment than bank savings accounts and certificates of deposit. The plans also involve no risk to the principal, and often are guaranteed by the full faith and credit of the state. It is also important to note that most plans require that either the account owner or the beneficiary be a state resident when the account is opened. There are other highlights of this type of plan that must be noted: If the child dies or decides to not go to college, the plans can be transferred to another member of the family. The money in the plan is controlled by the account owner only not the child. If the family moves out of state but the child attends a participating school, the family can still use the plan but may be held responsible for the difference between out-of-state and in-state tuition, (this is dependant on the plan they are using). Some plans will treat such a student as an in-state student, allowing the plan to cover 100% of the cost. Prepaid tuition plans also do not guarantee admission into college.
Another option that parents should consider is The College Sure CD. This type of CD is an FDIC-insured certificate of deposit that is indexed to college costs. It is offered by College Savings Bank. The College Sure CD is guaranteed to yield a fixed percentage of average college costs at maturity yet pays interest just like any other certificate of deposit. Once a College Sure CD has matured, the family can use the principal and accumulated interest at any school. Students are not restricted in their choice of school.
While this is only a brief overview of three major financial vehicles, there are many options available in helping to finance the cost of college. Before investing in any plan, experts recommend thoroughly investigating all the choices and consulting a financial expert if possible.