There is no doubt that the cost of college tuition is increasing at a staggering rate. The increase in household income is pale in comparison. Don't panic, but do be prepared. Do your homework, make a plan and get started saving for college.
There are numerous vehicles on the road to saving for your children's college education. One that is becoming increasingly popular is the 529 plan, or Qualified State Tuition Program (QSTPs). These are state-sponsored investment programs that are given special tax status. QSTP's seem to be the best overall choice for the majority of families, partly because there is no limit on contributions, no age limits, no phase-out rules based on adjusted gross income and because they work well with other education incentives. It is important to note that the individual state may impose its own restrictions.
Two types of QSTP's are available: the prepaid tuition program and the savings plan. Each are established and maintained by the individual state, which means that the state controls the investment of the contributions.
Prepaid tuition plans and choice
Participants are not necessarily stuck with a state school. Many states allow participants to transfer their contract to private or out-of-state schools. Beware, not all states give the full value of the contract.
It is important to note that some states do not guarantee the contract. In the worst-case scenario, the trust could dissolve, leaving no money for college.
Other education incentives
Although the qualified tuition programs may be the most obvious choice, do not discount other alternatives for planning for your children's college education.There are the IRA's (Educational, Roth, traditional), education tax credits (HOPE, Lifetime learning) and other tax incentives (bonds, deductible interest on student loans, employer-assisted programs) and financial aid. Sit down with your financial advisor to talk about all your options and which plan is best for you. When it comes time to write your first tuition check, you will be glad you did.
Remember that a 529 plan is essentially a state-sponsored mutual fund. The hope is that the account owner's contribution will grow over time at a greater rate than tuition prices. There is a risk that the underlying investment will not keep pace with the increase in tuition. To help combat this, some states will alter the focus to more conservative investments as your child nears college age. Because of the flexibility and lower risk of the savings plan, it is perceived to be superior to the prepaid tuition plan.
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