College Savings Resources Guide

College Savings Guide From the moment you find out you have a baby on the way, your mind is filled with questions. Will you have a boy or girl? What will you name him…or her? What kind of supplies and gear will you need? How will this new addition change your life? What kind of parent will you be? But more and more, the question that sends parents into a mind-numbing panic is: how soon should you start your college savings?

Over the last couple of the decades, the number of high school graduates who go on to attend a college or university has continued to rise. In fact, according to the National Center for Education Statistics, the number of students who go on to post-secondary education has increased by 30% since 2000 alone.

The irony of this fact is that as the numbers of students attending higher education institutions have increased, so have the costs. CollegeBoard monitors trends in higher education and according to their estimates, tuition and fees have risen 9% at public four-year institutions, 11% at two-year colleges, and a staggering 13% at private non-profit four-year schools – and that’s just since the 2011 school year. Add room and board on top of regular tuition and fees and you could be looking at a bill of well over $20,000 year for in-state, public tuition. Of course, if you have a child who refuses to even look at state schools because of his or her specific academic interests, then the costs can soar even higher.

Needless to say, the looming costs of college can be a source of concern for many parents – so much so that many parents start saving as soon as they find out that there’s a baby on the way. For other parents, college savings may not be possible right away because of budget constraints. Either way, when the time comes and the final figures start rolling in, the prospect of paying for four years of higher education can be daunting.

As parents, we naturally want to ensure the best and brightest future for our children. In a perfect world, this would mean paying for their college education without the need for student loans. And yet, as we all know, it’s not a perfect world. For many families, student loans are a necessity. But that doesn’t mean that we can’t do our best to minimize those loans (or alleviate the need for them all together) with some careful planning and at least a modest amount of savings.

To get started on your college savings plan, you have to first know the type of saving plans and products that are available. Of course, any plan that you choose should be carefully researched and possibly even established with the help of a trusted banker and/or financial advisor. But, if you’re just starting your search and the options seem overwhelming, the following suggestions will provide a much needed jumping off point to start your college savings conversations.

529 College Plans

529 college savings plans are perhaps the most well known, and certainly, the most commonly used savings plans out there. These plans, named after Section 529 of the Internal Revenue Code, provide tax advantages on money that is specifically set aside to cover higher education costs. Earnings from money invested in these accounts is exempt from federal income tax, and when needed down the road, can be withdrawn without tax implications as long as the funds are used for qualified expenses, such as room and board, books and tuition. Likewise, if your child earns scholarships or chooses not to go to college, you can transfer the funds to another child.

But, like most financial products, not all 529 plans are created alike. Each state sponsors their own version of the 529 plan, with a variety of structures and options. Fortunately, Virginia offers an impressive 529 plan. In fact, Morningstar, an independent investment research organization, awarded the Virginia529 plan a gold rating in 2016, naming it one of the top 529 plans in the nation. Learn a little more about Virginia’s 529 options below.

Virginia Invest529

As one of two types of 529 plans available in Virginia, Invest529 provides parents with savings flexibility, as well as tax benefits. This plan offers more than 20 portfolio options and allows you to select target savings’ dates and choose how aggressively you want to invest. And because these plans are FDIC-insured, your savings are protected up to $250,000.

Another appealing aspect of the Invest529 plans is how easy it is to get started. Unlike some 529 plans, Invest529 can start with as little as $25 and offers year-round enrollment with no state or beneficiary age requirements. For parents who are getting a later start on their college savings, this can offer significant peace of mind. To learn more about Invest529, register for a free webinar or find upcoming information sessions throughout the state.

Virginia Prepaid529

Prepaid 529 plans help to alleviate future tuition guesswork by allowing parents to pre-pay for future semesters of college. Prepaid529 offers several different payment plans, including one-time payments, monthly payments, and down payments. Factors such as the type of school your child attends (Virginia public, Virginia private, or out-of-state) will impact how the plan pays out when the times comes to utilize it, so you’ll want to be sure to read all of the fine print. But, for parents who are fairly certain that their child will attend a state school or don’t want to have their investments subject to the ups and downs of the stock market, this plan can provide a number of benefits, including all of the tax breaks of a standard 529 plan. Learn more here.

 

Roth IRAs

Although Roth IRAs are traditionally used as retirement accounts, they can also be utilized for college savings. They work in much the same way as an investment 529 plan in that they are tax-advantaged accounts, meaning that they do not get taxed on earnings or when you withdraw the money for qualified education-related expenses.

As you invest in a Roth IRA, the money earned is reinvested to increase your savings – which also means that you can be more aggressive in your savings if you invest more. It is important to note, however, that these accounts tend to have annual investment caps and can have income restrictions. But on the bright side, if you happen to have a sports prodigy or academic genius on your hands, then scholarships can cover many of their school costs and you’ll have that much more waiting for you at retirement. Compare top Roth IRA plans here.

 

Coverdell Education Savings Accounts

Education Savings Accounts, or ESAs, provide tax benefits on both account growth and qualified withdrawals. However, like some of the other plans we’ve mentioned, they offer both an upside and a downside.

On the upside, Coverdell accounts can be utilized for more than just college costs, making them even more flexible than 529 plans. With a Coverdell savings account, you can cover qualified expenses throughout your child’s academic career – from specific costs in K-12 all the way through grad school. They also offer a wide range of investment option, allowing you to choose the best path for your budget and comfort levels.

On the downside, Coverdell accounts come with an annual investment cap of $2,000 and an annual income cap of $110,000 for single tax return filers and $220,000 for families filing joint returns. To learn more about Coverdell Education Savings Accounts, visit the IRS website, or talk to your financial advisor.

 

CDs and U.S. Savings Bonds

While not the most popular route to take for college savings, CDs and savings bonds are worth considering for at least a portion of your future expenses. These accounts are very structured, allowing you to invest a certain amount that will earn interest over time.

While they don’t offer much in the way of tax benefits and tend to offer lower returns based on current interest rates, they provide an easy, risk-free way to set some money aside. For certain savings bonds (Series EE and I), an education tax exclusion exempts any interest earned when the bonds are used for education-related expenses. But, it’s important to remember that these bonds only qualify for exclusions when they are listed in the parent’s name, not the child’s. So if you have well-meaning family members who want to provide gifts in the form of these bonds, you may want to have them listed in your name if the intent is to use them for college.

See some of the top-earning CDs here or talk to your bank or financial advisor about the best options. For a quick look at Savings Bond pros, cons, and fine print, visit TreasuryDirect.

 

Trusts (UTMAs or UGMAs)

We all went to school with that one student who was referred to as “the trust fund kid.” These were the students that were eating prime rib while the rest of us were on our second pack of ramen noodles for the day. While trust funds are often associated with the wealthy, the fact is, trust funds were what many parents used back in the day before college-specific savings plans like 529s had come into being.

Trust funds used to pay for college are typically structured as either a UGMA (Uniform Gift to Minors Act) or a UTMA (Uniform Transfer to Minors Act). Simply put, these accounts allow assets to be transferred in a beneficiary’s name to an account that is held by a trustee or third-party institution. The money is managed and invested by this third party until a specified time, at which point it is handed over to the beneficiary.

For trusts used to pay for college expenses, the beneficiary usually receives access to the funds between the ages of 18 and 21, which is perfect for college payments. BUT…and this is a huge “but”…unlike other plans that we’ve discussed here, there is nothing that limits how trust money is spent once it is in the hands of the beneficiary. That means your college student could use it to pay for school or to take an elaborate spring break cruise – in a yacht they bought with their college trust fund. Of course, it’s not likely that your child would be so extravagant, but like any plan you choose, the pros and cons should be carefully weighed and details should be discussed with a trusted financial resource. Learn more about the pros and cons of trust funds here.

 

Savings Accounts

You might be thinking that we saved the most obvious option for last. And in some ways, that’s true. But when it comes to covering the ever-rising costs of college, no plan should be undervalued. Savings accounts are the lowest return accounts, but also provide the greatest flexibility.

With a savings account, you can set aside what you want, when you want, without limitations or restrictions. Of course, there are very few tax benefits, and the temptation to withdraw money for other uses is always present. But if you’re looking for a simple, easy-to-establish savings resource, consider setting up a separate savings account that is just for education-related expenses.

Most banks allow you to set up regularly occurring electronic transfers between checking and savings accounts so that you can automatically transfer a set amount each month. Likewise, your child can also be part of the savings process with a savings account. You can encourage them to contribute their own earnings from a job, birthday money, or holiday money to the savings account, making them an active participant and investor in their own future. Be sure to talk to your bank about available savings account options.

 

While opinions on the best college savings methods may differ, all financial advisors agree that the sooner you start, the better.

Even a few years of missed savings can have a huge impact on your ability to cover education costs down the road. However, if you haven’t started saving yet, don’t let it send you into a panic spiral. Start with simple tools like the College Cost Calculator at SavingForCollege.com or visit Virginia529 for a wide array of resources, online tools, and informational videos. Likewise, the more you know about your financial aid options, the better. Visit Federal Student Aid (FAFSA) to learn more.

Last, but far from least, talk to other parents who have been through the process or consult with a trusted financial advisor or banker. For a list of additional college resources and savings options, check out Richmond Mom’s College Resources page. And remember, no matter what path you choose, every little bit counts – and one day, your children will thank you for it.