Introduction
Welcome to 529 & OtherCollege Savings Plans For Dummies, the practical reference for those who are thinking about and planning for college in the future for themselves or those nearest and dearest to them, and who want an explanation of all the options, pro and con, that can help them save for it.
College. Whether you’ve been there yourself or not, you’ve read all the information, looked at the charts and graphs, and you know that people who graduate from college land better jobs and earn better pay than those who don’t. So, of course, because you want the very best for yourself and your family (you do — that’s why you’re reading this), you want everyone you know, including yourself, to have that opportunity.
That is, until you look at the price tag. You’re already paying for food, housing, and clothing (not to mention phone, cable, insurance, and everything else under the sun, including dog grooming) and maybe even stashing a little bit into your retirement plan. And then you sneak a peek at the projected cost of college for the year in which your student expects to begin. And just as you never look at the least wrinkled car in a car crash, your eye automatically drifts to the highest number on that chart of projected college costs. And you begin to sweat.
There’s no question: The cost of college continues to soar, even when the rest of the economy stagnates, and this reality is not likely to change any time soon. Fortunately, everyone, including you, the various governments (federal and state), and the colleges themselves, are in on this secret, so everyone can plan and plot, well in advance of that eventual first day of your child’s freshman year, ways to get that child there, and ways to help you pay the bills when they happen. Consider this book to be your accomplice.
About This Book
The world of college savings plans is new, exciting, and changing daily (or so it seems — legislative leaders can’t seem to resist continuously tweaking the laws). Which is another way of saying that it also can be complicated and confusing — to everyone including the professionals, the financial planners, the tax folks, and your local bank or brokerage.
In this one-size-fits-all world, the powers that be have recognized that all people don’t save money the same way. Some save more, some save less, some can live with risk, and others can’t tolerate any risk. Clearly, no two are alike, but you’re all savers, either present or potential. Numerous options exist that make saving possible and desirable for everyone.
Piling savings option upon savings option has created opportunities for most people. But all the new options have also muddied the waters, because choosing between Plan A and Plan B can be downright difficult when they seem so similar. So many people may choose to opt out, admitting confusion and doing nothing, because it’s all so confusing, and no one wants to screw up a choice that has so much riding on it.
And yet, it doesn’t have to be that way. I’m here to tell you that it is possible to understand the costs associated with college, both right now and in the future, and then to find ways to pay for those costs, in the most advantageous manner for you, both from a personal point of view and from a tax perspective. And you can’t focus on the personal and ignore the tax implications, nor can you do the reverse. Both are essential components, and the most successful savings program takes both elements into consideration.
That’s where this book comes in. It’s designed to explain the strategies that are out there to help you save, save, save. There’s no doubt that the bill will be large; there’s also no question that, with planning, strategy, and purpose, you can achieve your goal and provide the means that will allow you and your family all the benefits of a college education.
529 & Other College Savings Plans For Dummies is simply a way to find a reasonable solution to a seemingly unreasonable problem: saving for future college costs in the sanest, least stressful way possible for you. In keeping with the theme of stress reduction, you can use this book in a variety of ways:
As a reference: It’s all here: the ins, the outs, the do’s, and the don’ts. The world of college savings is one of very specific rules, and they’re here, in all their glory, and they’re all explained.
As an advisor: It’s a case of the very good savings techniques, the merely okay savings techniques, and the truly ugly techniques (which you really want to avoid), and this book highlights them all. It’s true that what works for you may not work for your neighbor, but every savings option involves risks, concerns, and just-plain crystal ball reading. This book explores all the ups and downs and ins and outs.
As a little light reading: Amazingly enough, the topic of money can be mildly amusing, and college savings is no exception. Read this with an eye towards the absurd, and you won’t go far wrong.
Parts of 529 & Other College Savings Plans For Dummies are about very specific situations that you will, most likely, never come across. Still, this book would be lacking as a complete reference if I didn’t include a lot of the minutiae in the text on the chance that someone, somewhere, may need to know what happens to a Section 529 plan in the event of a death of a plan owner, for example.
Also, as a caution, be aware that any projections in the book are just that: projections. I have no special hotline to the powers that determine rates of returns on investments, increases in tuition payments, inflation rates, tax rates, utility rates, or postage increases (which might be really useful). Increases and decreases may be greater or lesser over time — I have no way of really knowing. All the projections should provide you with is a picture of relationships between like numbers; don’t read any more into my crystal ball projections than that.
Conventions Used in This Book
To help you navigate through this book, I use the following conventions:
Italic is used for emphasis and to highlight new words or terms that are defined.
Boldfaced text is used to indicate keywords in bulleted lists or the action part of numbered steps.
Monofont is used for Web addresses.
Sidebars, which look like text enclosed in a shaded gray box, consist of information that’s interesting to know but not necessarily critical to your understanding of the chapter or section topic.
Foolish Assumptions
The world of money and taxes is rife with assumptions, foolish and otherwise. Here are some of the assumptions I’ve made about you:
You’re not aware of the variety of college saving options available to you, or you’re aware but baffled by the number of plans or the way the plans work.
You may have some idea of how much sending Junior to college will put you back, but you need more details.
If you are saving for college, you probably feel as though you’re not saving enough.
You can’t walk into a bookstore or surf the Internet without buying every book you see with a snazzy, eye-catching, strikingly-appealing, jaw- droppin’ good-looking yellow-and-black cover.
If you’re not yet saving for college, you may feel that you don’t have room in your budget for that expense. After paying your monthly living costs, you may have nothing left to save.
If you find yourself identifying with any of the above, then 529 & Other College Savings Plans For Dummies gives you the information you need to start saving or kick your savings into high gear.
How This Book Is Organized
This book takes all the different components of college savings — from the necessity for it, through all the different sorts of savings plans, and finally to ways to augment with grants, loans, and scholarships — and breaks them down into easily digestible chunks — okay, parts, if you want to get technical about it. And each part is comprised of a few chapters. The following is a brief description of each part:
Part I: Figuring Out the Cost of College — and How to Pay It
There’s no question, the number is huge, but how huge is it? Sounds like the start of a bad joke, eh? Well, it isn’t a joke, but dealing with the big cash question doesn’t have to be that bad. After a brief overview of the scope of the book, this part looks at the current and projected future cost of postsecondary education, including vocational and trade schools, public and private colleges, two- and four-year institutions, and graduate and professional schools. It focuses on savings techniques, and finally, it lets you know who’s available to make contributions into the savings pool.
Part II: Piecing Together Section 529 Plans
One of the recent entries into the college savings plan sweepstakes, Section 529 plans offer seemingly unlimited choices and high contribution limits (at least if you listen to the people who are trying to sell you their particular plan). This part dissects these plans, explaining how they work, why they work, and when they work, or don’t, as the case may be.
Part III: Uncovering Coverdell Accounts
The new, improved, and renamed Coverdell Education Savings Accounts (formerly known as Education IRAs) have now become real players in the college savings arena, and more and more financial advisors, banks, and brokerages are touting their benefits. This part explores them in full detail, showing their good and bad points and explaining how and when they may, or may not, make sense for you.
Part IV: Filling In the Gaps: More Ways to Save for College
Saving for college has been around a lot longer than Section 529 plans or Coverdell accounts. So Part IV examines some of the more traditional ways to save for college and shows situations where these tried and true methods still may make sense for you. But what happens when all else fails and your savings come up a bit short? This part explains how the world of financial aid — loans, grants, and scholarships — works and how your college savings may factor into college financial aid decisions.
Part V: The Part of Tens
It’s the part you’ve hopefully come to know and love. The For Dummies Part of Tens — this time with a college-savings twist. You like easily accessible top-ten lists? Here you go. The whole point of so-called “college savings plans” is first, to save, and second, to pay as little tax on your savings as possible. The chapters in this part give you hints on saving successfully, and tell you what you must do to dodge as many taxes as possible. The book includes one final element that’s not technically a Part of Tens — it lists way more than ten things. But I thought I should let you know about the appendix, which gives you a more detailed look at the various Section 529 plans offered by each of the 50 states and the District of Columbia. The appendix gives you an apples-to-apples comparison of what is currently out there so you can make the best decision for your particular situation.
Icons Used in This Book
The icons that you come across in this book identify information or words of caution that you may find especially helpful.
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Where to Go from Here
You can, if you want to and have the time, read this book from cover to cover, and it will give you a great view of how much, how, and where to save money for college. But if you don’t have the time or the interest, you may choose to hop around from topic to topic, skipping those that don’t apply at all to you and paying more careful attention to those that do. That’s one of the great things about For Dummies books. You can get in and get out wherever and whenever you choose. If information that you need to understand a certain topic is covered elsewhere, the text will direct you, so you don’t need to worry that you’re missing basic information by skipping over a portion of the book.