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Saving for College: what are my options?

By Justin Laue, Harbor Intern

Education is something most parents want for their children, but saving for it can be difficult especially with the rising cost of college tuition nationwide. The burden of debt associated with student loans can be overwhelming for young adults. Setting up a savings plan to pay for your child’s education can relieve them of this headache and push them a little further up the ladder towards financial stability. The problem is that there are numerous savings vehicles to choose from when deciding where to put away money for college. A few of these options are explained:

529 College Savings Plan

One of the most attractive college savings options is the 529 college savings plan. Money is contributed, after-tax, into these state sponsored accounts and then withdrawn tax-free for qualified expenses related to an accredited higher education institution. Fund restrictions vary from state to state, but may be used for things such as room and board in most cases. Some states also provide a state tax deduction for contributions from parents and possibly grandparents. Parents own the asset directly and retain the ability to change beneficiaries as they see fit. If one child decides not to attend college or excess funds in the account exist after a child completes college, then the funds can be transferred to a new beneficiary.

Prepaid College Tuition Plans

Prepaid plans are similar to 529 plans in their tax implications, ownership, and potential to change beneficiaries. However, major differences are present. Prepaid plans will not fluctuate in value with changes to the market as they are used to directly purchase tuition credits at a set price. You are effectively locking in today’s tuition price for use at a later date. If your child is considering an out of state school this program may not be for you as it was created specifically for in state colleges. That does not mean it can’t be used if a child changes his or her mind, but penalties will apply and some value can be lost.

UGMA/UTMA

An UGMA/UTMA account may be preferable if a child does not plan to attend a qualifying university under the 529 plan, or if he or she will need money for expenses unrelated to education. UGMA/UTMA are custodial accounts that transfer to the minor once he or she reaches the age of termination, specific to each state. These funds are then under direct control of the minor and can be spent how they choose. Tax implications differ for this savings vehicle as well. The first $1,050 invested are free of tax, while the next $1,050 is taxed at a very low (kiddie tax) rate. Unearned income (dividends, interest) in excess of $2,100 are then taxed at Trust tax levels. These plans can be preferential if your child is leaning towards trade school or has a big expense in their near future such as the purchase of a car or a wedding.

Any of these investments could be right for you and your child depending on your particular situation. The first and most important step is deciding to save. After that having a conversation with your child or trying to gauge their future aspirations is a good idea when evaluating your available savings vehicles.

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