The Business of College Planning

Of course, the earlier parents start saving, the better. A little goes a long way; $100 per month over 17 years with a 7% return will yield nearly $40,000. Once you determine how much of your child’s education you can afford to pay, here are some strategies to help cover the bill.

Invest in Qualified Tuition Plans
Qualified Tuition Programs, or Section 529 plans, let you save and invest money that’s exempt from federal taxes. There are two types: 1) college savings plans; the performance of the plan’s investments determines the account’s value when it’s time to withdraw the funds, and 2) prepaid tuition plans, which let you lock in tuition at a set rate, so when it’s time to withdraw the funds from the account and college costs have risen, your rate is locked in. Of course, if sponsoring states can no longer afford to pay the tuition costs as promised, parents may get stuck with the bill (see Money, “Should You Prepay College Tuition?” June 2012).

“If you want your child to go to your alma mater and it participates in the Private College 529 Plan, consider that instead,” says Zaneilia Harris, president of Harris and Harris Wealth Management in Upper Marlboro, Maryland. More than 270 schools offer prepaid tuition under the Private College 529 Plan, which includes the HBCUs Spelman College and Clark Atlanta University.

Each state offers its own 529 plan, and many allow residents from other states to participate. Compare fees when choosing a plan. “Ideally you want the plan that you are investing in to have fees under 1%,” says Kantrowitz. Some states also offer other incentives, such as state income tax deductions or tax credits. You can choose between a direct-sold 529 plan in which you select your investments, and an adviser-sold plan, which offers professional guidance. With an adviser plan, you’re paying an adviser on top of the fees that the 529 is charging you.

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