Baby’s College Fund: 529 Plans vs. Gerber Life College Plan

By on Mar 19th, 2012 | Family, Livin' the Dream, Pay Yourself

“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where the money is invested or turn it over to professionals (broker fees apply, in addition), and once the money is withdrawn it is generally tax free.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?

I usually have one of two things: a remote control or a pen. If I’m not geeking out over all things entertainment, I’m writing about them.

5 Responses

  1. Chance Jones November 24, 2012 at 6:51 am

    We have a 529 with Edward Jones and add when we can. We have Gerber college plan and pay into the plan monthly. We view Gerber as just a safe savings plan. The boys also have bonds from family members. However the cost of a college education is becoming further out of reach for many young adults.

    Reply
  2. Jacqueline Hernandez July 11, 2013 at 11:17 am

    I Have a young son, I applied for the Gerber College Plan so he had something for college when he got older, unfortunately he was denied because I was disabled. Whatever the reasoning it is still wrong, I get turned down for life insurance all the time and it always gets me, but I never thought my son would be turned down because of that. I understand its part life insurance in the plan but a heads up to disabled, sick, or unhealthy parents would be nice so we don’t get that slap in the face when we try to do something great for our children’s future.

    Reply
    • QueenRP September 23, 2013 at 3:12 pm

      It’s not your son that got denied, but you. Not trying to insult you or rub salt in the wound or anything, but just like you mentioned there is a life insurance policy in the plan……..Gerber Grow Up Life IS A Life Insurance Policy. Gerber is selling this Plan as College Plan but it’s actually a Whole Life Insurance Policy. That’s why you got denied, like you’ve been getting denied for the life insurance companies. Jacqueline listen to what Stratis Narliotis is saying, just get a 529 plan it’s extremely better!!!

      Reply
  3. Stratis Narliotis August 25, 2013 at 10:55 am

    Encouraging people to start saving for college is a laudable goal. Steering them towards a life insurance plan for children as a means to save for college is misguided at best. There is no reason to pay fees for the life insurance part of the plan if you are trying to save for college.

    If you are sure you will use the money for college, putting money in a 529 plan is by far the best choice since the money grows tax free. If you are not sure, put the money in a savings account until you accumulate a decent amount and then put it in a CD or a mutual fund Money Market so you at least get something in return. With mutual funds you can set up automatic monthly contributions making saving easier. The Gerber Life College Plan is useless as a college investment and it is shameful that they advertise it as a way to save for college.

    Reply
  4. Danielle McDole January 28, 2014 at 10:33 am

    The life insurance plan covers the parent in event of death, not the child. Many people misunderstand this. It protects the child if you can no longer make payments.

    Reply

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