Save Smart For College!
By Karen Von Der Bruegge
Summer 2008
Even if you’re still buying diapers and baby formula, the thought of sending your child to college probably has crossed your mind. It also may cause you some stress since annual tuition can range between $5,000 a year for a public four-year university to more than $30,000 annually for a private college.
But before deciding how – or even if – you are going to help pay for those costs, it is important to look at the numerous ways to pay for higher education. From tax-deferred savings plans to grants to scholarships, there are many different ways to send your little one off to college without saddling him or her with a mountain of debt afterward.
Start Early With A 529 Plan
529 plans are named after the section of the federal tax code that covers such deductions, and these plans allow you to save pre-tax money to pay for college tuition. This money is placed into some type of investment that earns interest, allowing your money to grow.
Every state offers at least one version of a 529 plan, and all contain features that make them a great savings tool:
- The money you invest is set aside tax-free.
- You can withdraw money from the fund for qualified education expenses, also tax-free.
- You take advantage of compounded interest, giving you more money in the long run.
Two basic types of 529 plans are available, but some states provide as many as four varieties. Each of these offers different benefits, restrictions and methods of paying for college.
Prepaid tuition plans allow you to save for a college or university in a specific state. The advantage is that the cost of tuition is locked into the rate charged when you open the plan. With tuition costs continuing to rise, this is an effective way to hedge against those raises. The money also is transferable to another family member without tax penalties if your child decides not to attend college.
The disadvantage of the prepaid tuition plan is that most states insist on some type of residency requirement – you or the child for whom you are saving must be a state resident. This can prove difficult for military families due to frequent moves and the generally mobile military lifestyle.
Your “state of residence” – which may not be where your family is currently stationed – is the state you selected on DD Form 2058; it also appears on your Leave and Earnings Statement (LES).
College savings plans differ from prepaid plans in a number of ways, but the main distinction is that a savings plan accrues much like a retirement savings plan; the money you contribute is invested in mutual funds and can increase as the stock market increases.
The advantage to this type of plan is that you can use it for higher education in any state; most do not include a residency requirement. If you lived in
The disadvantage is that you may not receive the full tax advantages offered by an in-state plan if you choose to use an out-of-state plan. Also, the state or federal government does not insure your 529 investments in any way, so be aware of the possibility that the fund could lose money.
All 529 plans have a few things in common.
Beneficiaries: “Anyone can be named the beneficiary of a 529 account, regardless of their relationship to the person who establishes the account,” notes the College Savings Plans Network. “You can even establish an account with yourself as the named beneficiary.” This allows you to save for anyone at any time, as long as he or she is “a
If your child decides not to attend college, you can change the beneficiary and transfer the funds, so long as it is transferred to a family member. You can also withdraw the money for non-education purposes, but any earnings will be taxed, and some plans include penalties for doing so.
Contributors: Anyone can contribute to a 529 plan – grandparents, cousins, friends, even companies and non-profits. This can lead to many opportunities, since people can make a donation in lieu of a present at a birthday and contribute to other family members.
Tax implications: You will not be taxed when you withdraw the money for educational costs; funds from investments in the plan also are not taxed. However, contributions are not tax deductible.
Alternatives: You probably should avoid custodial accounts such as Uniform Transfers to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) accounts. The money in these accounts legally belongs to the child and reduces financial aid, dollar for dollar. The 529 is treated as your asset, not your children’s, so it receives better treatment in financial aid formulas.
Searching For Scholarships
In addition to traditional athletic and academic scholarships, as well as those offered by local civic clubs and non-profit groups, literally thousands of scholarships are available just for military families. Private and public companies, non-profits and even the Department of Defense offer scholarships for servicemembers, their spouses and their children.
A Google search can yield more results than you can realistically sort through, so make your search as specific as possible. For example, if your spouse is an Army officer at
You can also try the appropriate military relief agency, military non-profit groups and even the commissary system, which offers one of the most popular military scholarship programs (check www.militaryscholar.org).
Every scholarship will list different criteria; some are specific, others are more general. Check all criteria and understand the exact requirements; you don’t want to spend time filling out an application and collecting paperwork only to find your child doesn’t qualify.
Apply for as many scholarships as you can (keeping the criteria in mind) to ensure that you’re getting as much as you can. Read the fine print carefully for rules that may limit your access to other scholarships.
The federal budget always includes several billion dollars in financial assistance. To receive aid, however, you must first carefully complete the Free Application for Federal Student Aid (FAFSA) form and include all the required information. Students may pick up a copy of the FAFSA form from their high school counseling office or any college financial aid office. You also may download them or complete them online at www.fafsa.ed.gov.
Because federal financial aid is distributed on a first-come, first-serve basis, it is critical that you submit the FAFSA form as soon as possible after January 1 during your child’s senior year in high school. Once the form is reviewed, the student will receive a Student Aid Report that outlines the types of government financial aid available based on the information submitted.
If you decide to apply for financial aid, you and your child should visit your child’s high school guidance counselor’s office, which should be able to provide a current list of available scholarships and grants. In addition, you can visit a college financial aid office, even if it is not the college your child plans to attend. Your spouse’s workplace, civic clubs, non-profits and other organizations also may offer money for college.
Untapped scholarship and grant dollars are waiting to be grabbed by those willing to do the research. With the rising costs of college tuition, every dollar counts.
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Karen Von Der Bruegge is chief marketing officer for Pioneer Services, a division of MidCountry Bank, which provides financial services and education exclusively to the military community. For more information, visit www.pioneerservices.com or www.pioneermilitarylending.com.
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Resources On The Web
Several websites can help you track down money to pay for a college education:
- www.militaryhelp.org: a large, comprehensive listing of military-specific links to educational resources
- www.students.gov: a portal into federal dollars for education, information about employment and other issues concerning students
- www.pueblo.gsa.gov: helpful information about 529 plans
- www.savingforcollege.com and www.collegesavings.org: complete lists of 529 plans, plus great calculators
- www.collegboard.com: general information about college costs
- www.salliemae.com: the largest provider of student loans in the
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The High Cost Of Higher Education
Age 1: amount you’ll need to save per month, $386
Age 5: amount you’ll need to save per month, $465
Age 10: amount you’ll need to save per month, $678
Age 15: amount you’ll need to save per month, $1,614
Cost calculation assumptions:
- Child will attend four-year public college as an in-state student
- Child enters college at age 18
- Child will spend four years in college
- Average public college tuition for in-state student, 2007-08: $13,589*
- 5% annual increase in college costs
- 5% annual return on personal savings for college
* Source: Trends in College Pricing 2007, The College Board®
Calculations: SavingforCollege.com
