A look at college savings options

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As time goes by, planning for a child’s college education is more challenging than ever before. The saving or investing method you choose will depend on your child’s age, as well as your financial resources. Other considerations, such as your preference for public or private schooling, and your eligibility for financial aid, may also play a role. Here is a brief summary of some of the more common college funding vehicles:

Mutual Funds. The ever expanding selection of funds available makes mutual funds a popular component of any education funding plan. However, investment return can fluctuate with market conditions and shares may be redeemed for more or less than their original purchase price.

Certificates of Deposit (CDs). Bank CDs offer safety of principal and guaranteed returns. Interest is subject to tax and current rates are generally low. The fixed rate of return guaranteed if held to maturity.

U.S. Savings Bonds. Government-issue savings bonds can provide stable yields and can receive tax-free interest when used for education. However, yields may be lower than with other investments. If these bonds are sold prior to maturity, they may incur a penalty and may be subject to market risk. In addition, savings bonds may not be tax exempt when personal income reaches certain levels.

Zero Coupon Bonds. These types of bonds are sold at a deep discount and can be redeemed at face value on a specified maturity date. Therefore, maturity can be timed to coincide with future college funding needs. However, interest income will be taxed annually as ordinary income, even though no income will be received. To avoid the annual taxation of the interest element, you can opt for a tax-free, municipal issue. If zero coupon bonds are sold prior to maturity, they are subject to market fluctuations and tend to be more volatile than bonds that regularly pay interest.

State-Sponsored 529 Savings Programs. Although many details of 529 plans (named for the section of the Internal Revenue Code under which they were established) vary by state, they generally come in two forms. Prepaid tuition programs allow participants to “lock in” tuition rates at eligible state colleges or universities with a lump-sum investment or monthly installment payments. The contract value may also be applied to private or out-of-state schools (although possibly not at full value, depending on the state). Savings programs allow contributions to vary and can be applied at any accredited institution of higher education nationwide.

Financial Aid. There are a number of financial aid programs available, typically in the form of loans, grants, work study programs, or scholarships. Eligibility for such programs is determined by an assessment of your financial situation that includes your income, your assets, your child’s income, and your child’s assets.

Loans. Several types of loans may be available. If you have adequate credit, you might qualify for a personal line of credit loan. This is typically the most expensive loan option. Some individuals might contemplate a home equity loan. Although interest from such loans may be tax deductible, these loans tend to have rates that are much higher than conventional mortgages. If you have a 401(k) plan, you may be able to borrow from your plan assets. In some instances, life insurance policy cash values can also be borrowed to help supplement college costs. Finally, your child may be eligible for a student loan. These loans tend to have reduced rates and flexible repayment options.

Scholarships. A select group of individuals are fortunate enough to qualify for scholarships from the college or university of their choice. In addition, some may qualify for partial scholarships from other academic organizations and foundations.

Begin planning now

It’s never too early to begin your child’s college funding plan. If you are able to anticipate whether your savings will fall short of covering your child’s entire college bill, you’ll be in a better position to thoroughly explore and potentially take advantage of alternative funding options. However, as with other types of financial planning, bear in mind that your child’s college funding plan requires a disciplined approach that emphasizes consistency with your overall goals and objectives.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

CDs are FDIC Insured to specific limits and offer a fixed rate of return if held to maturity.

Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy’s account value and death benefit. Withdrawals are taxed only to the extent that they exceed the policy owner’s cost basis in the policy and usually loans are free from current Federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

In addition to the risks of investing in Zero Coupon Bonds, investors should consider the Issuer quality, and call features of a municipal zero coupon bonds. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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The opinions and views in this blog post are those of the authors, and are not intended to provide specific advice or recommendations for any individual. Please consult professional advisors with regard to your individual situation.

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