College Savings Accounts for a Bad Economy
November 5, 2009
Many parents and students see college as the bridge between this life and a better one. While more and more kids are heading off to college, many are struggling with how they’re going to pay for it. While a recent study conducted by Fidelity Investments in California indicates that more parents have started some type of a college savings or investment account, many have experienced a decline in the value of the account because of the declining economy. The results reveal that this loss is in the neighborhood of 27%.
Many parents are wondering what types of accounts are available to save for college and which one may the best one for them. Some financial and college aid experts chimed in on a few of the popular ways that parents have paid for or plan to pay for college – even in a faltering economy.
Types of Savings
529 Plans. Many parents have invested in the 529 plan, which is an account specifically earmarked for paying for college. Many parents and grandparents have come to depend on these accounts to cover college expenses because withdrawals made from 529 accounts to pay for college expenses happen tax-free.
There are two types of 529 plans, prep-paid and savings. Thirteen states offer pre-paid tuition 529 plans. Most states, however, offer a savings 529 plan, which is similar to investing in an investment portfolio, so there can be a fluctuation in the account value.
Financial experts seem to have opposing feelings about these types of accounts. Gene H. Harrison, VP and Director of Financial Planning for D.A. Davidson & Co. says, “Most 529 plans offer a variety of age-based options that provide for a shift in the asset allocation from more aggressive to more conservative as the child nears college age. In other words, if you used one of the age-based approaches offered and your child was within a couple of years of entering college, the account should theoretically be in a conservative asset allocation.”Â
Stan Ezekiel of College Planning Group Inc. has a slightly different view, “Unfortunately, the only benefit of a 529 plan is that the gain is not taxable if it is used for qualified higher education expenses. If a family has an opportunity to put money away on a monthly basis, they would be better served investing in a whole life insurance policy.”Â
UGMA/UTMA accounts. Michael Lopata of College Plan 101 suggests UGMA/UTMA accounts, which are another popular type of account with parents and grandparents. The UGMA/UTMA college savings options can also provide tax-free savings without the higher expenses associated with maintaining a 529 plan.
Account holders have a significant amount of control over the types of investments made during the savings phase and on how the distributions are made. It’s one more financial management tool for earning tax-free income. There is also some flexibility built into these accounts because the money doesn’t have to be used for college expenses, so if your child decides not to go to college, your savings can be applied elsewhere.
Real estate. Real estate investments, especially as a long-term investment strategy, are another way parents have invested money and turned it into a college savings account. Take, for example, a small business owner in Florida bought an investment home for each of his three children when they were first born.
He rented out the single-family homes over the 17 to 18 years of each child’s life. The rental amounts typically more than covered the home’s expenses, so not only did he enjoy the increasing value of the properties over the years, but he was also able to turn a profit from the rent. A few years out from each child reaching college age, he sold the home and used the profit from the sale and the money he had saved over the years from the rent to pay for college tuition, room and board for the child.
If you have a young child, now may be the time to consider this type of investment. Real estate prices are affordable and expected to increase again over time. Now may be the time to buy a home or piece of real estate at a deep discount, rent it out and sell it later for more than you paid for it. With somewhat of an unstable real estate market, this is probably not the right investment for parents with older children that have less time before the kids reach college age.
Tough Times Mean Alternative Methods
In previous times, parents may have carried the burden of paying for college alone. In modern times, students expect to pay for at least some of their college education expenses – be it from a part-time job or using gift money saved over the years. This, however, may not be enough to make up the shortfall, and with some families worrying about how they’re going to pay for necessities, college savings is something they’ve had to push aside.
According to Upromise, more families do not have to sacrifice saving for college to pay the bills. By registering with Upromise.com, parents earn one to 25% in rewards when they shop online, dine out or buy groceries and gas. The rewards can be allocated to a 529 college savings plan. To date, Upromise has more than ten million members and has contributed more than $500 million in member rewards.
High school and college aged kids are also approaching paying for their college education with their eyes wide open. This means some kids are attending nearby community colleges or universities rather than going away to school. It’s saving parents on having to pay additional money for room and board and only requires covering tuition and book expenses.
Times have changed and money set aside for college may fluctuate. Recent economic hard times are not stopping parents and students from using old tried and true ways along with innovative ways to pay expenses and save money for future college expenses simultaneously.
No matter what type of investment or account you choose as your college savings account, there is some risk involved. The key is to create a plan and start saving for college as soon as possible. Second, find an account that matches the amount of risk you’re willing and able to make. Once you have a college savings plan in place, all that’s left to worry about is getting your child into and sending them off to the college of their dreams.
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