1) Don’t Save: Strangely, this is a form of savings. Here’s why: If you don’t save, you’ll probably have to borrow, and borrowing, assuming you intend to repay, is nothing more than deferred saving.
2) College-savings specific vehicles
529’s: About 10 million accounts have been opened in these vehicles, which are tax free (assuming the money is used for qualified higher education expenses). These vehicles, called “529s” and sponsored by states, are of two types.
Pre-paids: These simply guarantee you future tuition at today’s price. Example: if you were to purchase, say, one year’s tuition at Penn State University at $8,000 and your daughter is 14 years away from college – in 14 years you will own the equivalent of one year of tuition at Penn State, which could be used at Penn State or applied to any other college tuition bill. The risk of investing your money well enough to cover future tuition increases is assumed by the sponsoring state or an agency created by the state. Pre-paids are a safe, conservative way to save for college. Two potential drawbacks, however:
- Should you qualify for financial aid, the value of the prepaid investment reduces, on a dollar-fordollar basis, your financial aid eligibility.
- In the long run, stock market investments have historically increased at a greater rate than the annual increase in tuition.
Investments: Nearly every state also has a mutual fund type 529 investment. These plans do not guarantee future tuition and are subject to market risk. Many varieties exist, and some states have age-based portfolios and other variations designed to allow you to invest according to your own risk tolerance.
Coverdell Education Savings Accounts: Donors with annual income of $110,000 for a single person or $220,000 for a married couple may contribute, tax free, up to $2,000 per year in almost any investment they like. As with 529s, Coverdell accounts withdrawals are tax-free if used for college.
3) Other Investments: Many people don’t want to tie up their assets in college specific investments. Their logic is simple: tax issues, other cash requirements, liquidity and so forth weigh against segregating college savings in a separate “bucket.” These folks may prefer, for example, to sell a losing mutual fund, or refinance their home with the deductible interest.
4) Tuition Rewards: Here is a wonderful way to lower college expenses: earning guaranteed scholarships — actually discounts off full tuition provided by participating colleges, called Tuition Rewards. Over 220 private colleges and universities across the country have joined with SAGE Scholars to offer Tuition Rewards as a way to encourage families to plan and save for higher education. Tuition Rewards are accumulated annually, in a similar fashion to Frequent Flyer points and can equal up to one full year’s tuition, spread over four years of college. Families must (a) invest in any of a variety of qualifying financial vehicles and (b) identify children, grandchildren or other loved ones as potential beneficiaries. The earlier families enroll in the program, the more Tuition Rewards they earn. Go to www.tuitionrewards.com for enrollment information.