Chapter V
Saving For College
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To meet the challenge, some colleges have enlisted the help of outside organizations to spread the tuition payments over a period of twelve months. Generally, the outside provider makes the heavy tuition payments to the school at the beginning of each quarter or semester, while receiving monthly payments from the parents. In many cases, the plans are interest free but require an annual fee. For detailed information on this procedure, contact the financial aid administrator at the college or university or Facts Management Company, FMC , and Tuition Management Systems, TMS.
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The fastest growing program in America to help parents with high college tuition costs is the 529 or Qualified State Tuition Plan (named after Section 529 of the IRS Code). “Simply stated, the 529 plan is likely to be your best option for college savings if you have school-age children or grandchildren and are looking to invest significant amounts of money,” writes Joseph F. Hurley in, The Best Way to Save for College . See Saving for College .
Most state programs allow contributions in one lump sum annually or on a monthly basis. Under Section 529, there are 2 types of programs: 1) State prepaid tuition plans that guarantee the plan will cover future tuition costs at all state colleges and universities; and 2) State college savings plans that do not give the same guarantee but offer a potentially higher rate of return. Not everyone agrees on which part of the plan is the best. See more at Bankrate. (NEW)
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The newest Prepaid Tuition Plan managed by TIAA-CREF basically sells shares that represent a fixed percentage of a year's tuition for 240 private institutions. Everyone pays the same for the shares. Log on to Tuition Plan for more information regarding the specialized “Independent 529 Plan.”
529 Update (NOT IN THE BOOK)
From the Atlanta based National Financial Service Group:
"If your son or daughter gets a college scholarship, federal rules governing 529 plans allow you to withdraw from the account an amount equal to your child's scholarship. You won't owe the 10% penalty that typically applies to the earnings portion of any withdrawal not used to pay the beneficiary's qualified education expenses. However, you'll still owe income tax on the earnings portion of the withdrawal.
If you want to make a scholarship-related withdrawal from your 529 account, you must provide written notice to the plan manager, along with proof of your child's scholarship.
But withdrawing money from your 529 account isn't your only option. Another course of action is to simply leave the money in the account for your child's future use. Most 529 plans allow funds to be used for graduate school. Or, you can change the beneficiary of the account to another child or qualified family member with no income tax or penalty implications. Either way, the full sum can be left to grow tax deferred in the account, and you'll enjoy the convenience of keeping the same plan.
If, though, you're unhappy with your current plan (e.g., high fees, limited investment options, poor customer service), then this may be the perfect time to roll over your funds to a different 529 plan. Under federal rules, you're entitled to roll over the funds in your 529 plan once per calendar year to a different 529 plan. You can keep the same beneficiary or name a new one. In the latter case, as long as the new beneficiary is a qualified family member, no income taxes or penalty will be due.
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