Getting a Jump on College
Any money that's saved for college will increase the student's school choices and decrease the amount of loans she needs to take. To help make it a little easier, the tax law allows for a few tax-advantaged account types that help protect the nest egg from taxes by allowing for tax deferral while the account is in force and in many cases not taxing withdrawals that are used for tuition. Additionally, colleges no longer consider these plans as student assets. This means that the assets are factored into the financial aid formula at the beneficial parental rate — or not counted at all, in cases where the account is owned by another family member.
Prepaid tuition plans are the more conservative of the college savings accounts. Under a prepaid plan, you minimize the impact of tuition inflation by buying into the current costs of college, below the inflated costs that will be charged years from now when your child is ready for school. Prepaid tuition plans are set up by each state and cover the major public colleges and universities in their state. In some cases, they cover a consortium of private colleges. The difficulty with these plans is that they limit the number of schools students can choose among. If the student picks a school not included in the plan, plan assets can be withdrawn, but there is no guarantee that the assets will cover costs at the chosen school. In fact, the assets in prepaid tuition plans are invested very conservatively, since they only need to stay ahead of schools' tuition increases. A student opting out of the covered group may find that his nest egg doesn't cover as much as he anticipated.
If you're concerned about a divorce, or are going through one, don't invest in a college fund at the expense of your own savings. Money in children's names — in UTMA or UGMA accounts — or in 529 plans is usually left protected in divorce negotiations. Besides, saving is even more important if you think you may be helping your child through college as a single parent.
529 college savings plans are a far better option than prepaid tuition plans because they're not limited to a specific group of schools and they allow for a broader range of investments — usually mutual funds following a specific asset allocation. These plans are also sponsored by the state, but participants are not limited to plans run by states in which they reside, or where they plan to attend college.
529 plans are organized as a basket of mutual funds managed by a fund company. They are distributed through brokers or directly to the public. Each fund company decides on the type of accounts it offers, but most give the investor the choice of choosing an age-based account or a style-based account. The age-based account acts much like a target-date mutual fund, with a specific asset allocation that is adjusted to be more conservative as the child gets older and closer to starting college. Style-based accounts assign a fixed asset allocation to fit the style they're tracking, whether it's conservative by owning a small amount of stock, or none at all; moderate; or aggressive by being invested almost completely in more risky stock mutual funds.
The research website
Contribution limits are linked to gift tax rules. In 2008, you can contribute up to $12,000 to a 529 plan if you're single, $24,000 if you're married. Plans allow five years' worth of deposits to be made in one year under a special rule. If you decide to make an up-front deposit of $60,000 in one year, this will preclude you making additional gifts to the child for five years.
Reward cards, most recognizably the one offered by UPromise, offer to add to your 529 plan when you buy certain merchandise or shop in specific stores. This may or may not be a benefit to your account, depending on whether you already buy the items that earn rewards under the program. Check the fine print and decide whether it's better to buy lower-cost items and bank the savings, or whether the reward card will benefit you.