The College Savings “Survival Guide”, Part 2

Pros, Cons, and the 4 Major Benefits
of Every Great College Savings Plan

Let’s begin Part 2 of my report with the 4 biggest benefits of a great college savings plan…

Guarantees. In other words, every dollar you put into the plan should be guaranteed to be there when you need it for college. So many times I have seen families ignore this important step. Instead, they put their money at risk and lose it, right before their child is about to enter college. Why would a parent make this mistake?  It’s because so many parents have been led to believe that they HAVE to forgo guarantees in order to stay ahead of college inflation. This is the wrong way to look at things. A smarter play is to adjust how much you save per month, if you want to have more in your account.

Liquidity. You need to be able to get to your money for college expenses when you need it – without penalty- plain and simple. But it’s also a good idea to have access to this money in case something else comes up, such as; a medical emergency or a job loss and an extended unemployment period. Or for the outside chance your child doesn’t go to college.

Tax favored status. The last thing anyone wants is to get slammed with a huge tax bill the year their child heads off to college. So any good college savings plan should have minimal to zero tax consequences.

Not included in the financial aid formulas. Some accounts hurt your ability to receive aid, while others don’t. You shouldn’t be penalized for saving for college. A lot of families assume they will never qualify for aid. Don’t make this mistake. I have seen a family with more than $250,000 of adjusted gross income qualify for aid. Granted, this was a special circumstance. But the point is that financial aid is one of the biggest sources of free money for college. Don’t hurt your chances for aid by ignoring the formulas.

College Savings Accounts:  The Pros and Cons

1. Non Tax-Qualified Mutual Funds And Stocks

Pros:  Unlimited upside gains, can be sold at any time
Cons:  Not guaranteed, unlimited downside losses.  Any growth is taxed when sold, or each year if there are short term capital gains which the income will be reported on the tax return. Depending on how they are registered, they can count against the student toward financial aid eligibility anywhere from 5.6 – 20%

2. 529 College Savings Plan

Pros: Tax deferred growth and tax-free withdrawals for qualified expenses. Unlimited upside potential on underlying investments (mutual funds).

Cons: Unlimited downside potential on underlying investments (mutual funds).  Counted as an asset of the owner.

3. Certificates of Deposit (CD’s)

Pros:  FDIC insured up to $250,000. Guaranteed interest rate.

Cons:  Possible penalties for withdrawing before maturity.  Counted in the financial aid formula depending on registration.

4.      Money market and bank savings accounts. (I have lumped these two together since they have virtually all the same features).

Pros:  It is FDIC insured up to $250,000.  Typically has a minimal guaranteed interest rate. There are no penalties for withdrawing for college or any other reason.

Cons:  The interest is usually low and probably doesn’t keep pace with inflation.  Also, with the problems in the current banking industry and banks going out of business, FDIC insurance could be slow to provide any guarantees up to $250,000. It is counted in the financial aid formula.

5. Non-Tax Qualified Fixed Annuities

Pros:  Principle and interest rate guaranteed. Usually higher than a savings or bank account interest.  Value is not counted in financial aid formulas. Growth is tax-deferred.

Cons:  Possible penalties for pulling out before 59 ½ and maturity on.  Taxes are owed on any gain distribution

6. Tax-Qualified Retirement Accounts

Pros: Unlimited upside potential. Account value is out of Federal financial aid formula

Cons: Unlimited downside potential, penalties and tax consequences with pulling out before age 59 ½, limited contributions per year. Contributions to such accounts are included back into the financial aid formulas.

7. Treasury Bills

Pros:  Considered by many the safest place to park money in the world. Backed by U.S. Government.

Cons:  Very low current returns.  Penalties for pulling out before maturity. Counted in the financial aid formula. No guarantees on principle if sold before maturity. Possible Treasury Bond Bubble forming that could pop if interest rates rise.

8. Municipal Bonds including Tax-Free Muni’s and Bond Funds

Pros:  Guaranteed interest rate. Can be tax-free.  Relatively safe.

Cons:  No guarantees on the principal.  Can be taxed.  Included in financial aid formula.  Could be penalties for pulling out before maturity.

9. Cash Value Life Insurance.

Pros:  Guarantees on the principal. Consistent returns. Growth is usually better than any fixed bank savings account. Cash value is not included in the financial aid formulas. Tax deferred growth and potentially tax free withdrawals.

Cons: Could be some penalties for distributions of gains taken out before 59 ½ years of age.

*****

Armed with this information, you are now in a great position to select the best plan for growing and protecting your child’s college savings account.  Choose wisely.

To your successful college planning,

Scott Weingold
Publisher, CollegeMadeSimple.com

* From the book Financial Reckoning Day Fallout, by Bill Bonner and Addison Wiggin

Related Articles:

Part 1 of the College Savings Survival Guide.

How Parents are Saving for College Today

The College Savings Crisis

The College Savings Crisis, Part 2

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Editor's Note: Scott Weingold has been ranked the #1 “College Financial Aid Expert Worth Knowing About” in the entire country by CollegeStats.org.  He has co-authored the book, “The Real Secret To Paying For College. The Insider’s Guide To Sending Your Child To College – Without Spending Your Life’s Savings.” Scott also publishes a popular free online newsletter, “College Funding Made Simple" which reveals insider’s tips, methods, and strategies for beating the high cost of college.

Scott is the co-founder and a principal of the widely renown College Planning Network, LLC – the nation’s largest and most reputable college admissions and financial aid planning firm. CPN is a proud member of the Better Business Bureau, the National Association of College Funding Advisors, the National Association for College Admission Counseling, the National Association of Student Financial Aid Administrators and the Student Affairs Administrators in Higher Education.

Scott, along with his college funding advisory team, helps thousands of families throughout the country with their college planning needs and offers a series of free educational webinars and workshops on “How To Pay For College Without Going Broke In The Process!” He's been featured or mentioned in The Philadelphia Inquirer, Yahoo News, TheStreet.com, Voice America with Ron Adams, Crains Cleveland Business, and on Cleveland Connection with James McIntyre.  Scott has published numerous articles and is a professional speaker who has addressed thousands of audiences online and offline throughout the United States.  His actionable insights and candid, open approach have earned him & his team numerous media interviews, citations, and speaking opportunities, and his free online video workshop is one of the Internet’s most widely viewed pieces in the college funding space.