Thursday, June 17, 2010

Saving for College

Do you have children? Do you want them to go to college someday? Then you need to start saving for their future college expenses right now. Beyond throwing some coins into the piggy bank or saving cash in a high yield online savings account there are some really great options available to start saving for your child's education. Here are two that I like:

1.) Savings Bonds - United States Series EE and Series I Savings Bonds are an excellent choice for saving for college if your tolerance for risk is low and your investment horizon is still a long way off. Both of these types of bonds offer preferential tax treatment when the proceeds are used to pay for qualified education expenses. The main difference between the two is how interest is calculated for each.

Series EE bonds earn a fixed rate of return for the life of the bond. The fixed rate is adjusted up or down according to the market each May 1 and November 1. So as you purchase bonds over time, some will have higher yields, while others lower, depending on market conditions at the time of purchase.

Series I bonds are a little more complicated since they have a composite rate that is the aggregate of a fixed rate and a variable rate. The fixed portion is similar to that of Series EE bonds, while the variable rate is correlated to the Consumer Price Index to give these bonds the benefit of inflation protection.

Both have limits on the dollar amount that can be purchased under a single Social Security Number each year (for any one SSN, you can buy $5000 each of paper and electronic bonds of both Series EE and Series I for a grand total of $20,000 worth of bonds each year)

Below is a comparison chart of Series EE and Series I United States Savings Bonds from, the official website to find information about and purchase United States debt.

2.) 529 College Savings Plan - Named after the section of the Internal Revenue Code from whence it came, a 529 College Savings Plan is an investment account that is, typically, operated by a state or state agency.

This type of savings vehicle is appropriate for investors of all risk levels and investment horizons since the investment options within a 529 plan are usually pretty broad. The main advantages of a 529 plan are the deferral of federal income tax on earnings within the account and the tax free treatment of distributions taken from the account that are used for qualified higher education expenses. Many states also offer preferential treatment for state income tax purposes if you invest in the 529 plan within the state you reside.

As mentioned above, the choice of investments within a 529 plan are usually great. I invest with the Oregon College Savings Plan and they have options ranging from a relatively safe Money Market fund (a savings account) to more risky Bond and Stock Mutual Funds. The Oregon College Savings Plan also offers a very simple to use age based strategy (the money you invest is automatically and gradually rebalanced towards less risky investments the older your child gets).

I like both of these options for saving for my children's education. My family is very fortunate to have a grandparent of our children that purchases each of them a $100 Series EE Savings Bond each month! My wife and I are currently setting aside $25.00 every month inside a 529 College Savings Plan for each child, too. Our investment horizon is still many years away, so we have time to build up this savings and hopefully give our children a leg up on the ridiculous cost of higher education.

For more info on Series EE savings bonds, click here.

For more info on Series I savings bonds, click here.

And, for information relating to 529 plans in general and the Oregon College Savings Plan (the one I use) click here and here, respectively.

1 comment: