Saving money for college is most likely on every parent’s list, but it can be a bit difficult to figure out which college saving tool fits your budget and your lifestyle. With so many different ways to save for college how do you choose the one that's right for you?
Good question. Let's break down the five most common college savings tools and discuss the advantages and disadvantages of each plan when it comes to your military family's financial plan.
Savings Accounts or U.S. Savings Bonds
In my, oh-so humble opinion, savings accounts and U.S. Savings Bonds are a wonderful part of any savings plan, but not necessarily the tool I'd use to save for my child's college education. If you're risk averse (read: scared to lose your money), these types of accounts are "safe," when it comes to preserving your principle deposits (what you save is AT LEAST what you get). Savings accounts aren't really meant for long-term savings and growth — they make a much better tool for socking away money for a rainy day or an emergency.
U.S. Savings Bonds, specifically the series EE and series I, can be used for college savings but only as far as paying for tuition. All room, board, and other fees are considered non-qualified withdrawals and will incur a 10% penalty. You would get more bang for your buck using a 529 or Coverdell ESA with fewer restrictions on the types of educational expenses you can cover.
The Uniformed Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act are the granddaddies of the modern day college savings movement. One of the features that I find myself balking at as a parent is that UGMA/UTMA accounts are custodial accounts, meaning that once your child reaches the age of majority (depending on the state, typically between age 18–21), the account becomes your child's asset.
A great perk of a UTMA account is that the funds aren't restricted to use for strictly educational expenses. You can apply the funds to any expenses that are a benefit to the child, like summer camp or piano lessons.
Coverdell Educational Savings Accounts
Coverdell ESAs were once known as Education IRAs and are rather interesting accounts. Coverdell accounts have a $2,000 deposit per year total cap, regardless of how many children you're saving for. The neat thing about these types of accounts is that you can apply the funds towards K-12 education, which is really great, if you plan on sending your child to a private, public, or parochial school. Unfortunately, because the savings cap is so low, it isn't my favorite option for college savings.
Now we're getting to the true hero of the college savings movement. There are two types of 529 plans, prepaid tuition plans and college savings plans. The prepaid plans are exactly what they sound like — parents can lock-in today's college prices by pre-paying for the child's education. The savings plans on the other hand work more along the line of a systematic investing plan rooted in mutual funds that grows tax-deferred, and when used for qualified educational expenses, withdrawals are not subject to federal tax and in most cases state tax.
As far as military families go, it's really important to do your homework about 529 plans. You are not limited to investing in a state sponsored-529 in your state of residence. You can invest in ANY state's plan. My rule of thumb? Figure out what tax advantages are available to you. If there aren't any tax advantages to you investing in the 529 for your state of residence, you're a free agent. The bottom line? Do your research and see how all the state-sponsored 529 plans stack up.
The Post-9/11 GI Bill
I think the military family universe rejoiced when the Montgomery GI Bill provided an option for service members to transfer their educational benefits to their spouse or child(ren). Granted, you have to opt in to the Montgomery GI Bill and then opt in again to transfer your GI Bill funds, but other than that, you can't ask for an easier way to set aside money for your military kids.
Here's a rundown of the benefits your children are eligible to receive:
- 36 months of benefits (nonconsecutive is okay…think of one school year as 9 months)
- tuition and fees
- monthly housing allowance
- annual book & supply stipend
Here are some other useful things to know:
- You can split your educational benefits between your children (i.e., child 1 receives 18 months and child 2 receives 18 months)
- if the service member used any of their educational benefits during active duty service, they will only be able to transfer the remaining benefits.
- If you transfer your benefits to your spouse, he or she is not eligible for the monthly housing allowance (children are though)
I encourage you to visit the VA's GI Bill Website for more detailed information.
The Verdict: College Savings Strategies for Military Families
As any good personal finance professional would say, it's best to diversify your savings strategies. You can combine several of these strategies to help you work toward your college savings goal, which is what we've decided to do in our planning. We plan to combine the 529 savings plan along with my husband's Post-9/11 GI Bill to cover our two girls' educations. Ultimately, you have to pick the tools you feel most comfortable with. The only wrong choice you can make is choosing not to save!