Parents worried about college funds

Parents worried about debt relief in the future may see their children’s college funds as a huge obstacle to overcome. Many parents are nervous because of the economy and wondering how they are going to handle putting their children through school. Mary Connelly, a Boston based single parent., stated, “I can barely handle the cost of sending my children to private schools now. I don’t see how I’m going to manage in 10 years from now considering tuition goes up every year.”

For parents planning college education funding, there are options available. One is the prepaid tuition plans that certain states offer. The plans let parents to purchase schooling, at current tuition rates, and apply it to future costs. Parents are also allowed to defer paying federal income tax on earnings until the money is withdrawn.

Prepaid tuition plans can be very effective for a lot of parents, because they differ from college savings plans. College savings plans usually offer high return rates not influenced by college tuition. The return can be greater, there’s a risk that the investment can lose value over time.

How prepaid tuition works

Each state dictates how the prepaid tuition account works, but the general rules are that parents and relatives are allowed to purchase tuition at today’s cost. They can pay the cost up front or in installments. The investments are guaranteed to help with the costs of higher education later on. It’s a great way for parents to put money towards their own debt relief, retirement savings, and also putting aside for their children. Another benefit is that anyone can actually contribute to the plan, at any time.

Questions to ask

There are some issues to be sorted through when investing in prepaid tuition plans. Parents should be well versed in the following:

• Can the account be transferred? When can the transfer take place?
• When is enrollment?
• What costs does the plan cover?
• If parents stop paying, what is the penalty?
• Is there a difference between choosing a private or out-of-state college?
• How are taxes affected?

What about the risks?

Though the prepaid tuition account is beneficial, there are things to consider. First, the returns on these account pale in comparison to stocks. If parents start putting away for college when their child is in grade school, stocks might be a better option. Typically a prepaid tuition account is an option parents choose when they’ve waited until the child is in high school to curb college expenses. By this time stocks probably won’t mature enough in time to pay for college.

Prepaid tuition accounts also lack some flexibility. Enrollment out-of-state could hamper full benefits of the account. That’s why it’s important for parents to understand the nuances of the plan they choose and any “what ifs” that are involved. Another issue is if children don’t decide to go to college. Taking out the money and not spending it on tuition could come with a severe penalty. These accounts are notorious for their strict refund policies.

College funding in the future

The prepaid tuition plan is a great option for parents who are worried about the rising costs of college in the future. They offer parents peace of mind, and give them other options with their money while their kids are finishing school. They won’t have to scramble to fund college, and they can put their money toward debt relief, retirement savings and bill management. Prepaid tuition plans can be useful if researched and decided upon wisely.