Did you know that $14,000 could pay for a $100,000 college education?
It’s true. If you invested $14k the day a child was born, assuming 11% return, it would be work over $100k by the time the child enters college. Unfortunately, a young couple with a new baby (and subsequent hospital bills) is rarely ready to chunk all that money toward college.
A recent study found that two-thirds of American grandparents provided financial support to their grandchildren during the past 5 years.
The average amount given over that time period was $8,661, and 25 percent increased giving as the economic downturn unfolded.
A recent bankrate.com article provides us with 4 options for Mimi & Pop-Pop to cover school:
Section 529 college savings plan. This 14-year-old educational investment vehicle, named after the Internal Revenue Code that created it, is administered at the state level, although a student may use the funds anywhere in the country. The popular plan enables investors to choose from a menu of mutual funds, much like an IRA or 401(k) plan. The parent retains full control of the fund, which is revocable. Anyone may contribute and there is no age restriction on a 529 plan.
I would give this plan as an A- plan.
Section 529 prepaid plan. Many states and public colleges and universities offer the option to prepay all or part of the cost of an in-state public college education. An Independent 529 Plan offers a similar program for private colleges. The return on investment will usually decrease should the recipient attend school out of state or choose a different college.
The return on these plans do not measure up to the market. Thus, I would give these plans a D.
Coverdell education savings account. Think of Coverdell as an educational Roth IRA, although its annual limit of $2,000 per child and parental income limits make it an awkward fit for some families. The parent typically acts as custodian for this irrevocable fund; investment options may include mutual funds and/or individual stocks and bonds. On the plus side, the fund can be tapped for certain K-12 expenses. On the minus side, K-12 flexibility will expire — and contribution limits will drop to $500 annually — in 2010 unless Congress extends them. Coverdell contributions end when the recipient turns 18 and must be withdrawn by age 30 to avoid fees and penalties.
ESA’s are fairly new products, but are the best option for college savings. If it were not for their contribution limits, they would be an A+ option.
UGMA/UTMA. This supercharged, modern-day equivalent of a grandchild’s savings account was made possible by the Uniform Gifts to Minors Act, or UGMA, of 1956 and the Uniform Transfer to Minors Act, or UTMA, of 1986. It essentially allows donors to give or transfer assets into a custodial account for a minor without creating a trust.
The UTMA is a great choice if the grandparents can just write a check for college. If circumstances permit, the UTMA route is an A choice.
In the end, any college savings plan outweighs not saving for college. But choosing the proper plan can mean thousands of dollars in tax savings and inversely increased savings.