College Savings Plans for Denver Parents

Pre-paid tuition
plans

A pre-paid tuition plan
promises to lock in tomorrow’s college costs at today’s prices.  These plans used to receive unfavorable
treatment under federal financial-aid formulas, and that made them an iffy
choice for all but the most affluent
families.

Congress fixed that problem in
the Deficit Reduction Act of 2005, which changed the status of prepaid plans so
that they are treated the same as two other popular education vehicles:  College Savings Plans and Coverdell
Education Savings Accounts.

Although prepaid plans do have
their drawbacks, with the cost of tuition rising faster than the rate of
inflation and student loan debt set to get more expensive, you should explore
prepaid plans before deciding on a college savings strategy. 

How the plan
works:

Prepaid tuition plans are actually cousins
of the more popular state-run plan known as the 529.  A
prepaid tuition plan allows  you to
save for school within a tax-deferred investment.  Withdrawals are tax-free when used for
qualified higher education expenses. 
This account is considered the asset of the  parent, rather than the student, which
minimizes their effect on need-based
aid.

Prepaid plans are designed to
take the investment risk off your shoulders (unlike a 401K). Prepaid plans tend
to work better for families with younger children than those whose kids are
already in high school. Grandparents and others can contribute too.  Families are allowed to purchase blocks
of tuition that can be used later, 
at one of the plan’s covered schools.  If tuition rises after you have
purchased the blocks, it does not matter: A semester purchased now will still
buy a semester’s worth of tuition 10, 15, or 20 years from
now.

Which schools are covered
depends on the type of plan:

In the State-run plans, the
blocks typically can be used at any of the States public colleges and
universities. The price of the blocks is based on a  average of current tuition at those
schools.

The Private plan, known as the
Independent 529 Plan,  the
prepaid tuition can be used at any of more than 250 participating colleges.  Remember, even if you buy the tuition
plan ahead of time, your child still must meet the academic entrance
requirements.

If your child doesn’t enroll in
a covered school:

There are provisions if your
child does not attend a covered school. The state-run plan determines how much
tuition your investment would buy, on average, at an in-state school.  They give you that refund in cash, minus
any administrative fees.  The
private plan refunds an amount equal to your original investment, adjusted by
the performance of the trust in which the money is invested.  That adjustment is limited to a maximum
annualized gain or loss of 2%.

Other Key Points:

Some state plans require you to
be a resident of that state. If you move out of state you would still be able to
use the money at an in-state institution, but may be responsible for nonresident
tuition fees. 

There are 18 States that
currently offer the prepaid plans.

In addition to refunds, you are
allowed to transfer the plan balance to another 529 plan, including another
state’s program.  This allows you to
preserve the tax advantages.

The average four-year private
college now charges more than $29,000 for a year on campus.

Careful planning and time spent researching your college
education, can make your dreams a reality and lessen the worries of the reality
of paying for that education for years to come.

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