In this article, Nine Year Mortgage will share a few options that you have in helping your children start saving for their future education.  We all know that education is widely thought of as a key to our future success.  In order for us to get that key, we must have money to fund our educational endeavors.  Starting to invest early helps money to grow over time.  These plans will help your child’s money grow, so you can stress less about how they will end up pay for college.

Nine Year Mortgage discusses 529 College-Saving Plans

Despite the bad image 529 college-saving plans have gotten recently, the winds of change are sweeping in and re-adjusting things.  With a 529 plan, you can save for college expenses such as tuition, books, fees, supplies, equipment, room and board and so on.  However the plan will not cover expenses such as student loans.  The earnings from this plan can be withdrawn tax-free and may even offer a state income tax break.

In 2008 the average 529 college-savings plan lost nearly 24% of their investment .  Uneasiness grew regarding the security of the plan, so in 2010 more money was taken out of the accounts than was added into them.  This was the first time this had ever happened.  In a time span of three months, there was $113 million in net outflows leaving the accounts. Nine Year Mortgage speculates that the reason for this is because families are now sending more kids off to college and they need to tap into their 529 plans now.

The industry is making a come back by redefining asset allocations and adding more options to their plans.  Those options include low-cost index funds and bank products such as certificates of deposit and savings accounts.  Prepaid plans allows you to purchase tuition credits at today’s rates, and then use those rates later for your child’s future education.  Recently Nebraska’s First National Bank of Omaha lowered the programs fee from .6% to .26%, in addition to expanding outside investment options and making the portfolios more conservative.  Other 529 plan providers offered new products or cut fees last year to help combat the negative views.

Although the industry is doing much better, families should try to spread their risk over several different investment options to reduce any unseen risk.  This will help you to not be too self reliant on any one investment and will also provide you with more flexibility in case the money in your investments is needed somewhere else for purposes other than education.

Coverdell Accounts

With Coverdell accounts you can make tax-free withdrawals from the account to pay for a wide range of educational expenses.  These expenses can range from paying for a private grade school, for college tuition, and even for computers.  As an investor, you have the option of going to a bank, a brokerage company, or a mutual-fund company to open an account where you will be offered a variety of investment choices.

There are some income requirements that must be met in order to contribute to the account.  Unlike the 529 college-saving plans, this plan does not allow investors to take the state tax deduction.  Because of changing tax laws, some companies have decided to stop offering the Coverdell Account to new investors.  In the case that your family’s income exceeds the limit for this account, grandparents who are in the lower tax bracket can open an account for your child.

Bonds and Savings Accounts

Everyone wants a sure and secure investment option, especially  in today’s unstable economy.  Many savings accounts are offering extremely low interests rates, yet about 50% of parents saving for their child’s education end up putting their money there or in a Certificate of Deposit.  Some people might be tempted to go with Treasury Inflation- Protected Securities also known as TIPS because the interest rate moves in proportion with the Consumer Price Index.  Nine Year Mortgage advises against this because if the U.S. economy takes a dip, investors could potentially lose their money.

Brokerage Accounts

Brokerage accounts are gaining in popularity because they are more flexible in regards to how you can spend your money.  This account allows children who do not end up going to college or who might receive a full ride scholarship to still use the money elsewhere.  This is beneficial when compared to the strict rules of a 529 plan where a 10% fee is charged on the gains for any money that is withdrawn for non-educational purposes.

Retirement Accounts

Another option you might consider is a Roth IRA.  They also offer greater flexibility when it comes to spending your money.  Again, if a child does not decide to go to college or gets a scholarship, the money in the account can still be used for retirement.  A benefit to this account is that retirement assets are usually not included into financial aid calculations. Yet, distributions from an IRA may count as income, which can hurt a student’s chances at receiving financial aid.  Because the contributions are funded with after-tax dollars, the original contributions to the account may be withdrawn at any time without being penalized to pay for higher-education purposes.

Borrowing According to Nine Year Mortgage

You might ask yourself if it makes sense for you to borrow money from the bank or to just use your own money instead when paying for school.  Well, that all depends on the after-tax interest rates.  If you take money out of your savings account, you are losing the return on investment.  Yet, if your loan has a higher percentage rate it does not make sense to go that route.  In general, it is cheaper to use your savings because you are only gaining 1% to 2% interest on your investment, while your loans may charge you 4.5% for a federally subsidized loan.

Nine Year Mortgage Sums it Up

All in all you want to be able to find the best savings plan for you and your family.  Whether that means a plan that is very flexible, one that is more conservative, or another that has the greatest potential for your investment is up to you.  Nine Year Mortgage suggests that you evaluate all of your options to determine which path is best for you and your situation.  But whatever you do, remember that if you follow through with this investment effort, you and your children will have greater peace of mind in the following years to come.

For more ideas on how to help your children save, read Teach Your Kids to Manage Their Money by Nine Year Mortgage.

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