All parents worry about the future for their children. That’s a given fact! While it’s commonly said that for most people a home purchase is the largest investment they’ll ever make, a parent’s investment in their child often exceeds the cost and financial complexity of a real estate transaction. Of all the expenses parents face during a child’s life, very few are more dreaded than the eventual price tag associated with going to college.
There are basically two different plans that make the most sense for the majority of parents. The Gerber Life College Plan and a 529 College Savings Plan are the popular choices among parents. There are other options available, but these two seem to always be at the top of the list. These plans are quite different however with both offering their own set of advantages and disadvantages to those enrolled.
Considering the rising cost of college education, most parents these days are eager to get something started soon after bringing home that little bundle of joy. The fact is the average tuition has been steadily rising each year for both public and private colleges. Sometimes there is a little relief from things like college grants and scholarships. But these often will not cover the cost of everything. The main goal is to keep the average person from being buried in huge amounts of debt once their child begins attending college. That’s why it is important to begin a program to pay for college related expenses while the child is still very young.
Let’s look at a few different ways to save for college:
529 College Savings Plan –
The 529 plans are paid through the state. They are also known as state qualified tuition programs. You don’t always have to be a resident of that state to get the plan you want. If you live in PA you can certainly get a plan in Ohio or another state, but you may get more benefit from going with a PA plan because you live there. With this type of program, the owner of the account appoints a beneficiary for whom the funds are being reserved. This is typically the son, daughter, or some other close relative of the account holder. With the 529 plan, the account holder even has the option to make themselves the beneficiary. With the 529 plans, the funds are typically furnished by anyone other than the account holder themselves. Mainly it’s the parents who deposit money, but it’s easy for family members and friends to deposit money as well as a gift for the child.
This money is then invested in things like money market funds, stocks or bonds, and similar lower risk investments. The owner of the account has the liberty to choose where the money is invested even having the option to allow expert investors such as investment brokers to get involved. The money in the 529 plan is tax free upon withdraw. One catch with the 529 type plan is that the money must be spent on college related expenses. If the beneficiary fails to comply with this rule then the money is treated as non-educational funds with penalties charged. In addition to this, there will also likely be taxes charged against the funds on the income gained.
With the classic 529 plan, there are no restraints or limits for age or residency. There is also no expiration placed upon the policy itself. This way if the owner of the account has a child who chooses not to attend college there are no worries. They can still continue with the policy and use the money for a different child who does attend college. They can also make his or herself the beneficiary. Using the money for other causes than higher education will typically bring a 10-20% penalty against the entire sum in the account.
The name “529” refers to Section 529 of the IRS tax code, which gives these plans special tax breaks to encourage saving. When that money is withdrawn, if used for qualified education expenses only, the interest earned on those investments is completely tax free. If used for nonqualified expenses, the interest earned (NOT the principal amount you invested) is subject to tax and an additional 10-20% penalty in most cases. In addition, the amount contributed yearly can be a deduction on state income taxes (depending on where you live, but definitely in PA).
The pre-paid 529 plans or tuition plans are controlled directly by the universities themselves and permit the owner of the account to pay off the tuition before the participant begins college. The downside is this type of plan only covers the cost of tuition as opposed to traditional 529 plans which can be used for any educational related expenses. The person who selects this type of 529 along with the beneficiary must both be a resident of the state in which they open the account. Also, the expenses for tuition are locked and cannot be changed. The money with this plan is also non-taxable and the best part is all your money is backed by the state government.
A 529 college savings plan is great should your child decide to go on to further their education. The only drawback is if they do not want to do that, you will be taxed and penalized if you take out the money for non-educational purposes. The funds cannot be utilized outside of educational expenses, in most cases, so it’s important to know what your 529 plan will and will NOT allow.
Selecting a 529 College Savings Plan checklist –
- Is there a restriction on who qualifies as an eligible beneficiary?
- Is the plan available to residents in my state?
- At which colleges, universities, or vocational schools may the money be used?
- Do I have to name a specific school when buying a prepaid tuition plan?
- Are prepaid tuition plan benefits guaranteed by the state?
- Does the plan have any minimum contribution requirements?
- Is there a limit on how often I can invest in the plan?
- What is the maximum amount that I can invest?
- What expenses are covered by plan withdrawals?
- What is the plan’s refund policy?
- What fees are associated with my plan?
- Can I change how my money is invested?
- What are the risks associated with each of the investment options?
- Does the plan limit how soon I can begin taking withdrawals from the account?
- Does the plan impose any penalties for withdrawals from the account or impose any account termination fees?
- What if my child does not pursue a postsecondary education?
Gerber Life College Plan –
The Gerber Life College Plan provides a secure way to help pay for college, with both guaranteed growth and the additional benefit of adult life insurance. This plan clearly offers a return on investment in the form of college tuition money either from the saved monthly premiums or in the event the parent dies. The Gerber Life College Plan is a twist on an old idea of using life insurance as a college savings plan. The plan is an endowment life insurance policy, meaning it pays out after a set number of years or if the policy holder passes away.
The Gerber plan has a guaranteed benefit payment of $10,000 to $150,000 when it’s time for your child to enter college, after a decade or two of paying monthly premiums. If something happens to you before your child reaches college age, the beneficiary would get the full plan payout. The Gerber Life College Plan will generate some taxable income. They will send you a statement (Form 1099) to file your taxes. That’s definitely something to take into consideration, especially if you hate paying taxes.
Gerber typically recommends a specific monthly payment plan for achieving the goal for each individual. They promise their representatives will arrange a plan to fit any budget and that their payments will not increase over time. They also guarantee account holders will receive everything back that they put into the account so there’s no risk if the stock market crashes tomorrow.
It’s important to remember that the Gerber plan does not really invest funds in anything other than the plan itself; therefore, it has been sparking some criticism from financial gurus and investors. A benefit of The Gerber Life College Plan is that it can also be used as a life insurance policy because it does mature immediately if the policy holder dies. The beneficiary will have the option of using the money for education expenses or anything else they choose.
One benefit of The Gerber Life College Plan is that you are not limited in the use of your own money. You can use that money for whatever you need at that time. With a 529 college savings plan, you have to use that money towards qualified education expenses, which usually include tuition, room and board, books, and things of that nature. So, you can’t use it for a car, down payment on a house, wedding, medical bills, etc.
However, the drawback of The Gerber Life College Plan is that it has a very low rate of return. In fact, it’s so low that you’d probably be at the same ROI (return on investment) if you were to stick your money under the bed mattress and not touch it for a few years. Chuck Jaffe of MarketWatch said that he calculated the return on the “safe investments” that Gerber touts, and he determined it was “virtually nothing.”
Other College Savings Plans –
You might be wondering if a 529 College Savings Plan or the Gerber Life College Plan are your only options. There’s good news! They are NOT your only options. While we feel the 529 College Savings Plan is much better than the Gerber plan, it too has some drawbacks to consider.
So, is there something else that might be a better fit for your family and your current financial situation? The answer is YES, and here are a few other options: Roth IRA, Stocks and Bonds, High Yield Savings Account, and Certificates of Deposit (CDs). It’s a very good idea to establish a diversified portfolio and put your money into many different institutions to keep it spread out in case something bad happens like a stock market crash. If your money is spread out and it’s not all in one institution you can worry less about losing it all overnight if a crash were to happen.
It’s always a smart idea to speak to a financial planner or advisor about matters such as this. They can go over the different types of savings plans and accounts available and help you decide what would work best for your family. When you’re talking about investing thousands of dollars, you really want to speak to a professional. Here’s how to find a Financial Advisor close to you: http://findanadvisor.napfa.org/Home.aspx
Conclusion –
Although it might sound backward, it’s important to put money in for your retirement FIRST. The reason being is so that your kids don’t have to support YOU later on in life, which puts a financial burden on them. If you or your spouse has the option for a 401(k) that your employer will match, invest up to that percentage limit. Then, worry about saving money for your child’s college education.
Financial planners can be very helpful at this stage, and some will even do a consultation for free. Get a recommendation on a financial planner from someone you trust or read reviews online. The financial planner can go over retirement investing and college savings investing. You can ask them any questions that come to mind. They will know what will work best for your family and your unique situation by asking you a few questions as well.
