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Educational Consumer Tips

Choosing College Savings Plans

Author: Better Business Bureau
Category: Finance

Tips for Choosing College Savings

1.  Understand the Tax Benefits

A number of college savings options offer federal or state tax breaks. Taking advantage of these savings options may greatly affect how much you can accumulate for your child's college education. For instance, if you contribute to a 529 college savings plan, earnings grow tax-deferred and withdrawals are tax-free when used for qualified education expenses. And both prepaid 529 plans and 529 savings plans allow for a gift tax advantage whereby you can contribute up to $65,000 to a 529 plan in one year.

In addition, many states allow you to deduct some or all of your contributions to a 529 plan (savings plans and prepaid tuition plans) if you're a resident of the state sponsoring the plan. In addition, states may offer other tax advantages for 529 plans. Because of these state tax benefits, you might want to check out your own state's 529 plan before considering other plans.

Everyone's tax situation is different, and state and federal tax law can be complex. You may want to talk to your tax adviser about which college savings
options are best for you.

2.    Examine Fees and Expenses

A college saving option with higher costs must perform better than a low-cost option to generate the same returns for you. Even small differences in fees and expenses can translate into a large difference over time. This goes for the various expenses involved with many 529 plans as well as mutual funds or stocks purchased through a Coverdell Education Savings Account. For mutual funds, check the fee table in the prospectus to see how the costs add up over time. If you invest in stock, make sure you understand how much in commissions you must pay and factor them into any gain you may make. 

3.    Know the Risks and the Rewards of Your College Savings Options

Compared to saving for retirement, your college-saving timeline is relatively short. At most, it may be 18 years. And for many people, it's a lot less. This reduces your ability to recover from a sudden market decline. Be sure your savings are spread over many types of investments. That way your entire college fund won’t get wiped out if one sector or asset class—like stocks or bonds—falls.

Carefully evaluate any college saving vehicle, and its investment options, before investing. Investment options with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your goals. To learn more about the investment strategy of investment options you are considering and their risks, read the following materials:

529 Plans. Read the offering circular or prospectus. It usually contains the investment strategy and risks of a 529 plan and its investment portfolios. Most 529 plans provide this document on their websites.

Mutual  Funds. 
Read the prospectus and shareholder reports. These are usually available from the mutual fund companies or your financial professional. Mutual fund prospectuses also are available in the SEC's EDGAR database.

Stocks and  other securities. Read a company's registration statement or annual (Form 10-K) and quarterly (Form 10-Q) reports. These are typically available in the SEC's EDGAR database. For companies that don't file in EDGAR, email the SEC'sOffice of Investor Education and Advocacy, or call (202) 551-8090, to see whether the company has filed any documents with the SEC.

4.   Understand Your College Savings Plan's Limitations and Restrictions

What happens to your college savings if your child decides not to go to college, you have another child or you lose your job? These events and many others could dramatically impact your college savings strategy. Unfortunately, most college savings options have various restrictions and limitations that may impact your ability to react to a changing situation. Review carefully any college saving options you're considering to make sure they have the flexibility and control you feel you need.

Information Provided by Finra: