California Tuition Admissions, Application and Fees

With the cost of college is skyrocketing seemingly on a daily basis, who’s to say how much tuition will cost once your child leaves the nest? That’s why it’s important to save in any way you can. Is it as important as saving for your own retirement? No. With Social Security an instable option at best and with pension plans going the way of the dinosaur, you’re pretty much on your own when it comes to retirement. Your child, however, will have several options when it comes to paying for college. Financial aid, student loans and scholarships are just the beginning. Regardless, it’s many peoples’ goal to help their child through college. With savings plans like the 529 now available, you too can reach that goal.

Simply put, the 529 plan is a state-sponsored vehicle to help you save pre-tax dollars to go towards your child’s college education. There are two 529 options: the savings plan and the prepaid tuition plan.

Through the prepaid plan, you’re able to pay for your child’s school at today’s tuition rates, even though they won’t actually be attending until years down the road. The amount in your 529 account is guaranteed to pay for tuition to your state’s public colleges and universities when your child is ready to attend. It’s quite the deal, though it usually doesn’t cover room and board costs.

One of the main drawbacks is that you or your child will have to be a resident of the state where your child attends college, which puts a damper on things if your California kid suddenly decides they want to attend Harvard. It depends on the contract, though. Some 529 plans do allow students to attend private or out-of-state universities, but you might have to forfeit some of the value of your account.

A safer and more flexible option than the prepaid plan is the 529 college savings plan. Through it, your child will be free to attend any university, public or private, in-state or out, and it includes room and board. The downside? The money you put into the college savings plan is only good towards whatever the cost of college is at the time your child is ready to enroll. No one know what that’ll be, but it won’t be cheap.

Most states put a cap on lifetime contributions to 529 college savings plans that range between $100,000 and $275,000, though most don’t have a limit on how much you can invest annually. Problem is, contributions of over $12,000 per year ($24,000 if you’re married) are subject to a gift tax. There’s a loophole here, however. You can invest up to $60,000 in one year to a 529 and it will be treated as five yearly payments of $12,000. But beware; going this route will leave you unable to make another deposit for the next five years.

So where does your money go when you put it into a 529 savings plan? Much like a 401(k), the goals is to invest aggressively early on, then choose the safer path the closer you get to needing the money. If you choose an age-based portfolio, your money will be invested in stocks early in your child’s life, and then moved to the bond market as he or she gets closer to college.

The 529 plan offers enormous tax savings if you use the money for its stated causeputting your child through college. Though your contributions to the fund are not considered tax-deductible, it will grow free of taxes and any withdrawal is also not subject to federal taxes. Depending on where you live, you might also get state tax deductions or exemptions from contributions or withdrawals.

The one big-time fallback to the 529 is the fact that it may limit your chances of receiving financial aid. That’s because withdrawals from the account are considered part of your child’s income, and will be assessed for financial aid purposes. It may or may not be an issue, depending on how much you have saved in the 529 account.

If you’re like most parents, saving for your children’s college education is a priority and a big challenge. Tuition and related costs at both public and private universities have been rising at 5% per year or more, far exceeding the rate of inflation. To put that into perspective, a child born in 2006 should plan on $110,000 in total expenses for four years at the average in-state public college; $300,000 for four years at a private university.

Financing these costs for one or more children is going to take planning and, most importantly, disciplined savings. Tax-advantaged “529″ College Savings plans are the savings vehicle of choice and offer important advantages over other options. A $3,000 annual contribution, beginning at birth, to a growth-oriented 529 plan should pay for one child’s in-state public education, and a $7,500 annual contribution for a four-year private education. A later start means higher annual contribution amounts.

529 Plan Advantages

- Large Tax-Free Contributions: Parents, grandparents, other relatives and even friends can contribute up to $12,000 per year per child, tax-free, to a 529 plan.

- Tax-Free Earnings and Distributions: All earnings in a 529 plan are tax-free. Distributions are free from all federal income and most state income taxes when used for tuition or other qualified college expenses. This makes 529 plans as powerful as Roth IRAs for long-term savings.

- Donors (parents, grandparents, etc.) “own” the 529 assets: Unlike a custodial account that typically becomes the minor’s property at age 18, 529 plan assets are always under the control of the donor.

- 529 plan assets are more advantageous for financial aid considerations: Plan assets are counted at a 5.5% rate by college financial aid offices, compared to the 35% rate used for custodial account assets.

- Unused funds in a 529 can be rolled over to another child’s benefit.

Have I caught your attention? Now the question is which 529 Plan is best for you and your children?

Choosing a 529 Plan

All plans are sponsored by individual states, but are typically available to residents of other states. Some states offer residents a state income tax deduction for contributions to their own plan. So, for residents of these states, that is the way to go. For those without that tax incentive or residents of states without an income tax, you can choose from just about any of the available plans.

Be aware that many 529 plans are heavily promoted by brokerages and other financial institutions and can carry large and completely unnecessary sales charges. Go with a plan with no sales or other load charges. Typical annual fees for asset and account management combined should be 1% or less.

Recommended 529 Plans

There are at least a dozen excellent options to choose from. Among these, we like the TIAA CREF-managed plans (California and others) and the Vanguard-managed plans in Iowa, Nevada, New York and Utah. The Vanguard plans, with their index investment strategies, have operating costs of less than 0.75%. A new entry is the Alaska plan managed by T Rowe Price. It offers a choice of first-rate actively-managed funds and at relatively low cost.

No matter which plan you choose, we strongly recommend an “age-based” investment strategy. These strategies range from Conservative to Aggressive. Age-based programs are dynamic asset allocation programs, similar to Target Retirement date funds. They are heavily invested in stocks when your child is young, gradually converting to more fixed-income and cash as college age approaches. This approach protects against the risk of a major stock market downturn just as the funds are needed.

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