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CONSIDER PREPAID TUITION PLANS FOR COLLEGE SAVINGSKey Points
For parents planning for their children's college education, there are several investment options to consider. One option that seems appealing is state-sponsored prepaid tuition plans available in several states. These plans allow parents to pay today's tuition rates with the assurance that the child will have the money to go to college when the time comes. They also allow participants to defer paying federal income tax on earnings until money is withdrawn for college. These plans sound very attractive because of their guarantee as well as relative simplicity. Prepaid tuition plans differ from college savings plans that seek higher returns not tied to the increase in tuition. College savings plans do offer the potential for higher returns than the rate of tuition inflation, but there is a risk that your investment could lose value. How Do the Plans Work?Each state's plan works a bit differently, and the newer plans offer more flexibility. Essentially these plans allow parents (and relatives) to "buy" tuition for the child at a fixed price. You either pay in full or pay in installments and you are guaranteed that your investment will keep pace with rising college costs. Depending upon the number of years you have until your child first enters college, your cost may vary. Since these plans work in part as insurance against rising college costs, there is some degree of speculation involved. Parents come out ahead if the tuition costs rise faster than the average and would do worse if college costs did not rise as fast. Historically, tuition costs have risen, keeping pace with inflation and sometimes outpacing the inflation rate. The other hidden benefit is that grandparents and other relatives — who may be unsure as to what they should buy as gifts — can also contribute to the plan. Questions to Ask
Factors to ConsiderDespite their benefits, these plans are not for everyone. That's because the returns on these plans do not match what you may receive in the stock market — especially if your child has five or more years before starting college. However, if you are like many parents and did not start thinking seriously about investing for college until your child entered high school, stock investing may not be the best option due to your relatively short time frame before you will need the money. One of the most cited drawbacks to these plans is their lack of flexibility. If your child chooses to go to an out-of-state or private college, he or she may receive only some of the benefits. If you want to transfer the amount to a sibling, some plans may disallow it. Even worse, if your child decides not to go to college at all, or for whatever reason you choose to withdraw money for some other expenditure, you may face very strict refund policies. Many plans impose a heavy penalty for withdrawing money for any reason other than college tuition. Although newer plans now offer more flexibility than their earlier counterparts, there are restrictions imposed on how and when you can transfer funds, should your child decide to go to an out-of-state or private college. The biggest disadvantage, however, may be the impact these plans could have on the availability of financial aid. Prepaid tuition plans significantly reduce the financial aid a family may receive since they directly reduce tuition costs. So families that need the most financial aid may be penalized because they participated in a plan. It might be a better option to save the same amount somewhere else or investigate a college savings plan. Sample of States Offering Prepaid PlansAlabama Prepaid Affordable College Tuition (800) 252-7228 Tax ImplicationsCongress recently expanded the tax advantages of these plans to include, among other provisions, the addition of room and board to the category of qualifying expenses. Some state plans also offer additional tax advantages. The IRS is unclear as to how participants will be taxed on the difference between the amount paid and the dollar value of the benefit received. At present, it is likely that the difference is taxable at the student's tax rate. You may want to consider the tax impact on your investment according to the present practice. CollegeSure CDsIf you like the idea of prepaid tuition plans but live in a state that does not offer them, you can still take advantage of the prepayment of tuition by buying a certificate of deposit offered by CollegeSure Bank in Princeton, New Jersey. These CDs are sold in units, or portions of units. One full unit at maturity may equal one full year's average cost for tuition, fees, room and board at a four-year private college. Each unit is guaranteed to pay at maturity one full year of average college costs — even if costs turn out to be higher than expected. These units come in maturities of 1 year to 25 years and all units mature on July 31. Since you can also buy a partial unit, many parents start with the minimum $1,000 CD and then add money regularly. If your child does not need the money, either because he or she decides not to attend college or gets a full scholarship, you will get your investment plus interest back. Although prepaid plans may not fit every situation's need, they offer benefits to many parents. It may be to your advantage to learn more about these options. Points to Remember
This information is provided by Standard & Poor's. Accuracy and completeness of any of the information cannot be guaranteed by Wachovia and its affiliates. The material is for your information only and is not an invitation to buy or sell securities mentioned. The information is not intended to be the primary basis for any investment decisions and is not designed to meet the particular needs of any individual. Consult with your financial advisor regarding your particular financial situation. Specific issues may require consultation with your tax advisor or attorney.
Copyright © 2004, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved. |
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