Building a college fund: Traditional savings vs. Investment

by Joy Mali Writer Whether you’re a parent wanting to provide a good education for your children or you’re a young person enthusiastically seeking a way to obtain a higher education, you will need to access the best methods for starting a college fund. In generations past, this was done by setting aside savings in a bank, by working more jobs, or by taking out loans. But does that work today and, if not, how do you meet the financial needs of a college education?

The Steep Rise of College Costs

Overall college expenses are rising more rapidly than inflation which makes it very difficult for acquiring money via traditional college savings plans. The average cost of college tuition for 4-year programs at either public or private schools has been increasing over the past decade.

According to figures released by the CSF (College Savings Foundation), from 2009 to 2010, total public college expenses for a 4-year program rose by 6.5 percent while private total expenses rose 4.4 percent. Based on a 5 percent yearly increase, college costs are projected to be $140,000 for a 4-year public and $280,000 for a 4-year private education by 2025.

Savings accounts accrue very little interest and the interest you do gain is taxed which makes them a last resort. Loans are also increasingly difficult to obtain due to many people having bad credit. The only way to remedy this problem is to get your credit reports and scores, fix your credit and then seek good college loans.

529 Plans

The 529 plan is an Educational Savings Plan created by Congress in 1996 and it gets its name from the Internal Revenue Code, Section 529, under which it stems. The 529 plan actually offers two choices. There is a 529 plan that focuses on pre-paid tuition which allows families to make advanced payments towards tuitions of selected colleges or universities. Then there is the 529 plan that is geared towards saving for college expenses such as tuition, books, supplies, room and board, etc.

The 529 plans are very good vehicles to use for long-term college preparation. They are tax-advantaged with no federal taxes being applied and, in most cases, no state taxes taken either. A few states even allow 529 plan contributions to be deducted from yearly income tax returns. They are also backed by the state and allow parents to set aside money strictly for college use. As a matter of fact, penalties are incurred if the saved money is not used for college purposes. All states, including the District of Columbia, offer at least one type of 529 plan with some states providing both options.

Alternative Plans

Various major companies offer alternative plans to provide college savings. For example, the Gerber Life College Plan presents a savings vehicle that projects the exact amount received when matured. Savings plans range from $10,000 to $150,000. All Gerber plans are guaranteed for payout as long as they do not have outstanding loan balances and premium payments are up to date.

Alternative college savings plans are usually better savings vehicles than a basic bank savings account since they normally accumulate higher amounts. Alternative savings plans also can provide additional benefits during their duration. For example, the Gerber plan provides life insurance so that beneficiaries receive full payment should something happen to you. You will need to check taxation regulations on each alternative savings plan since they vary.

Investing in the Stock Market

This is, by far, one of the fastest ways to acquire the cash needed for college. However, it is also one of the riskiest methods. There are multiple stock investment vehicles that are separated into low, medium and high risk categories and, unless you have a background in the stock market and how it operates, it is advisable to acquire assistance through a stock broker.

If the market is healthy then you can make good returns in a short period of time. However, if it takes a turn south, you could end up losing your investment. Another thing to keep in mind is that stock profits and dividends are taxable.

Joy Mali is an active finance blogger who is fond of sharing interesting finance management tips to encourage people to manage their personal finances. More specifically, she advocates that people should check credit reports and scores regularly.

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Created on Dec 31st 1969 18:00. Viewed 0 times.

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