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529 Plans allow you to get a head start on saving for your child's college education!


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529 Plans allow you to get a head start on saving for your child's college education!

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Gerber College Plan

FinancialRight now your child may be taking his or her first awkward steps or may be standing outside anxiously waiting for the bus on the first day of school. With the hectic nature of life in the modern world, it will be no time at all before you'll look at the same child as he or she dons a cap and gown and makes the proud march down the aisle to receive a high school diploma. Yes, those twelve to eighteen years seem a million miles away but in the meantime, the importance of a college education will continue to grow. As entry-level job requirements, technology, and job competition all increase, they make the future education and work environment your child will encounter much different than they are today.

The early days of your child's life offer a great opportunity to begin some basic educational financial planning to help tackle the future education cost burden—a little bit at a time. After all, according to the College Board, the average cost for a four-year private college in 2007-2008 was $23,712 per year (up 6.3% over the previous year) while the cost for a year's tuition at a public four-year college increased 6.6% to an average of $6,185. The College Board also reminds parents that a college education is an investment in future earnings. It's 2007 study, Education Pays, found that people with a bachelor's degree earn over 60% more that those with a high school education. During the span of a lifetime, that earning potential gap between a Bachelors degree and a high school diploma adds up to more than $800,000—quite an incentive to guide your child toward a college education.

FinancialIf the path to college is in your child's future, the government has a program in place that may help you put aside savings that can grow and eventually be applied to some of college's many expenses. The savings vehicle is referred to as a 529 Plan.

According to the U.S. Securities and Exchange Commission (SEC), a 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. Legally referred to as "qualified tuition plans," 529 plans are sponsored by educational institutions, states, and state agencies and are authorized under Section 529 of the Internal Revenue Code. There are two types of 529 plans: college savings plans and pre-paid tuition plans. They are widely available in all fifty states and the District of Columbia, each state sponsoring at least one type of 529 plan. Additionally, a group of universities and private colleges sponsor a pre-paid tuition plan.

When it comes to the two plans, there are some distinct differences that the SEC outlines. In general, a pre-paid tuition plan allows those saving for college to purchase credits or units at participating universities and colleges for future tuition and, in some cases, room and board. Most of these pre-paid tuition plans have residency requirements since they are sponsored by state governments. An added benefit is that many state governments guarantee investments in the pre-paid tuition plans that they sponsor.

On the other hand, college savings plans enable someone saving for college, the "account holder," to establish an account for a student—called the "beneficiary"—for the purpose of paying college expenses for the eligible beneficiary. Typically, the account holder may choose from a variety of investment options for his or her contributions. Such investment options may include bond mutual funds, stock mutual funds, money market funds, or age-based portfolios that automatically shift to more conservative investments as the beneficiary approaches college age. College savings plans can generally be used at any college or university. Investments in college savings plans, however, are not guaranteed by state governments and are not federally insured.

The following chart from the Financial Industry Regulatory Authority (FINRA) summarizes the major differences between the two plans:

Prepaid Tuition Plan College Savings Plan
Tuition prices at eligible public and private colleges and universities are locked in. College costs are not locked in.
Many plans are guaranteed or backed by the state. Not state guaranteed. Also, most investment options are subject to financial risk. Your investment may make no profit and may even decline in value.
Most plans have age or grade limits for the beneficiary. There are no age limits—open to adults and children.
Most state plans require that either the owner or beneficiary of the plan is a state resident. No residency requirement. Nonresidents, however, may only be able to purchase some plans through financial advisers or brokers.
Most plans establish lump sum and installment payments prior to purchase based on the age of the beneficiary and the number of years of college tuition purchased. Contribution limits for many plans are in excess of $200,000.
Limited enrollment period. Enrollment open all year.
All plans cover tuition and mandatory fees only. Some do allow for the additional purchase of a room and board option or use of excess tuition credits for other qualified expenses. All "qualified higher education expenses" are covered including tuition, room and board, books, computers (if required), and mandatory fees.

The SEC adds that investing in a 529 plan may offer college savers special tax benefits since earnings in 529 plans are not subject to federal tax and, in most cases, state tax, as long as withdrawals are used for eligible college expenses. If, however, money is withdrawn from a 529 plan and it is not used on an eligible college expense, you will be subject to income tax and an additional 10% federal tax penalty on earnings. State tax benefits and even matching grants may also be available but may only exist for those participating in a 529 plan in their state of residence. In addition, investing in a 529 plan may reduce a student's eligibility to participate in need-based financial aid. Be certain to read specific 529 plan details, and consult with your financial adviser and education institutions being considered for further financial aid implications.

The SEC also suggests considering the answers to the following questions to help guide you in choosing the right 529 plan:

  • What fees are charged by the plan?
  • What portion of my investment goes toward compensating my broker?
  • Are there circumstances under which certain fees can be reduced or waived?
  • Is the plan available directly from the state or plan sponsor?
  • What investment options are offered by the plan?
  • How long are contributions held before being invested?
  • What are the plan's withdrawal restrictions?
  • What types of college expenses are covered?
  • Which colleges and universities participate in the plan?
  • What are the plan's limitations?
  • When can the account holder change investment options, switch beneficiaries, o transfer ownership of the account to another account holder?
  • Does the plan offer special benefits for state residents?
  • Do the tax advantages of your state's plan outweigh the benefit of investing in another state's less expensive plan?
  • Who manages the plan, how has the plan performed in the past, and when does the current manager's management contract expire?

Making long-term financial plans is a challenging task for any family. However, when you take into consideration the future financial gain your child may receive by obtaining a college degree, the time and financial investment in these early years may well be worth the effort and impact on the family budget.

As with any financial decisions affecting your family, consult with your financial adviser, tax adviser, or legal representation before making any decisions.

U.S. Securities and Exchange Commission—
Financial Industry Regulatory Authority—
College Board—

Articles are provided for the general interest of our readers. Gerber Life Insurance is not responsible for any content and recommends that you consult the appropriate professional with any questions or concerns you may have concerning any financial or health related issues.

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