Baby’s College Fund: 529 Plans vs. Gerber Life College Plan
“How am I going to pay for this kid’s college education?” Every parent stresses about this, especially when considering average tuition at public colleges rose 8.3% to $8,244 in 2011. Private colleges rose 4.3%, and now cost about $42,224 including room and board. Scholarships and grants can take the edge off, but if you don’t want to overwhelm yourself or your child with mountains of debt, it’s important to start investing/saving now. Here are two very different, but popular options.
529 Plans are state-sponsored “qualified tuition programs,” whereby an account holder establishes an in-state account for a “beneficiary” (i.e., their child, relative, friend or even themselves). The money that’s contributed to the 529, which can come from any person other than the account holder, is then invested in stocks, bonds, money market funds, etc. The account holder can choose where the money is invested or turn it over to professionals (broker fees apply, in addition), and once the money is withdrawn it is generally tax free. The kicker, however, is that distributions from the 529 must be used toward education-related expenses or else penalties or taxes may be charged. For the traditional 529 college savings plan, there are no residency requirements, no age limits and no expiration dates, so even if your child decides not to go to college you can roll the money over to another child or even yourself. Emptying the account for other reasons will incur a 10% charge. As with any investment, there is no guarantee on return, but you can change the risk of your investment and once per year can even roll the account over to another state that performs better, if your state is not doing so well. Check out the College Savings Plan Network for 529 comparisons and links to state 529s.
There’s one other type of 529 plan: Pre-paid tuition plans. These are sponsored directly by colleges and universities and allow the account holder to pay down tuition before the child enters college. They only cover tuition and fees, whereas traditional 529s can be used for any education expenses, but the moment you open an account in your state (residency requirements apply for account holder and beneficiary) tuition costs are locked in and not subject to change. Contributions aren’t taxed for this plan either, and your money is guaranteed by the state, but this version will reduce your child’s eligibility for financial aid.
The Gerber Life College Plan is less of an investment tool and more of a savings account with slightly better interest. With Gerber, you essentially choose how big of a payout you want ($10,000 to $150,000) and when you want it (10 to 20 years). Gerber then suggests a monthly payment plan to reach this goal, but the claim is that Gerber Life College Plan can fit with any budget because you set the payments, they will never go up and you’re guaranteed to receive at least what you put in or more at maturity. A couple problems arise, however. Within the first couple years, your contributions won’t be taxed due to the small amount saved. But larger pots will generate taxable income every year. Also, your money won’t accrue a ton of interest because it isn’t really invested in anything beyond the plan itself. Some critics bash it as an investment tool because of this, but if you have trouble saving, a monthly payment may be necessary to start consistently contributing–the full amount is only met if all premiums are paid for on time.
The Gerber Life College Plan also acts as life insurance by maturing instantly if anything happens to the account holder. The beneficiary will then receive the full, promised amount, of which the money can be used for anything, not just education expenses. Furthermore, any funds withdrawn from the account act as loans, and if they’re not paid back on time and in full a percentage will be subtracted from the final amount. Basically it all comes down to encouraging savings. It may sound foolish to “invest” in something that won’t develop much interest, but at least it provides a low-risk alternative to college savings that actually teaches people to save. Call 1-888-913-7129 for more information from Gerber.
The problem with 529 plans is that the stock market is constantly in such great fluctuation that you could invest for a number of years only to have the final pot be worth less than what you contributed, or nothing at all. The Gerber Life College Plan guarantees specific payout but the final pot won’t be worth much more than your fixed monthly payments combined over term. When choosing how to save for your child’s college education, it really comes down to how risky you want to be with your money.
Have you started saving for your child’s college education? Are you using 529 or Gerber, or some other savings tool?