How to evaluate college savings programs: Part 4

By - Last modified: April 20, 2012 at 9:48 AM

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A recent report by InflationData.com reveals where the cost of education is going and, not surprisingly, it’s up.

Since 2000, overall inflation — as measured by the Consumer Price Index , or CPI — has risen 34 percent. Unfortunately college tuition over the same period has increased by 300 percent. At the same time, the Dow Jones Industrial Average has fallen by 13 percent, making saving for school even more difficult.

In earlier blogs, I’ve discussed Coverdell ESAs and UTMA savings plans. Another plan that is very popular is the 529 plan. The 529 plans are offered by states and give individuals some very attractive tax rates, if you choose your own state’s plan.

The money invested by aPennsylvaniaresident in our state’s PA 529 plan will grow tax deferred and, if used for covered expenses, can be withdrawn tax free. Anyone can invest in the plan for a child; even grandparents can give up to $13,000 per donor. And monies invested in the 529 plan will not affect a student’s ability to qualify for financial aid.

If the original beneficiary decides not to attend college or a vocational school, the money can even be used by another student or you can withdraw the money and pay the applicable taxes and gains.

All of these benefits are great, but the lesser-known PA 529 guaranteed savings plan offers even more. This plan has all of the tax benefits of a traditional 529 and the conditions of contribution are the same. The main difference is this plan guarantees your account will grow to cover the complete cost of the college credits when it is time for your child to attend.

It allows you to pick the level of school you'd like your child to attend — public, private, Ivy League — and buy those school credits at today’s cost. The program then guarantees that those credits can be used any time in the future for those schools, regardless of the increase in tuition expense.

I called the state and asked, "What happens if the money managers don't keep pace with cost of education and inflation?" The representative responded by saying the state makes up the difference!

At a time when educational costs have far outpaced the market and inflation, why risk your hard-earned savings in the markets when there is a guaranteed option available?

If you have a 529 plan and would like the guaranteed option, you can roll it over into a guaranteed plan and purchase the credits at today’s cost.

Like many other financial advisers, I often recommend investments in the market. However, there are times — like our current economic crisis — when a guaranteed plan can be an effective tool. To help you determine which direction suits your needs and investment philosophy, you should sit with a qualified adviser.

Joe Wirbick is president of Lancaster financial services firm Sequinox and specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.

Tax advice provided for informational purposes only. Tax returns should be completed in conjunction with a qualified tax professional. Sequinox Financial and JWC/JRAG do not offer tax advice and are not affiliated. Mr. Wirbick is an Investment Advisor Representative offering advisory services through Jonathan Roberts Advisory Group and securities through J.W. Cole Financial, Inc. Member FINRA/SIPC. The opinions expressed are those of Mr. Wirbick and based on information believed to be reliable but not guaranteed and subject to change and do not necessarily reflect the position of JWC/JRAG.

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