Four short-term savings strategies for adult learners |
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2. Prepaid tuition plans a good hedge against tuition hike
Two unfortunate byproducts of a tanking economy are state education
budget cuts and skyrocketing tuition, but prepaid tuition can help,
says Mark Kantrowitz, founder of Finaid.org, a financial aid Web
site.
"A prepaid tuition plan is a hedge against that," he says. "If you can invest in a plan before prices increase, you're going to get far more appreciation than you would from investments in the stock market."
One of the precious few savings vehicles that are almost guaranteed to pay off, prepaid tuition plans allow future learners to purchase tuition credits for tomorrow before inflation strikes.
The plans are simple. Instead of paying for tuition
at the time of enrollment, prepaid planners purchase credits at
a cost equal to or slightly higher than the current rate, then cash
them in when they're ready to attend school.
According to Finaid.org, college tuition grows at an average of 8 percent each year. So adults who invest $500 today in a prepaid program can expect their investment to grow tax-free by more than $100 within three years. And that's without the risk of the plan tanking just before you head off to school.
Offered through 17 states across the nation and through
the national Independent
529 Plan, all prepaid tuition plans grow tax-deferred, and distributions
to pay for college costs are federally tax-free. Those offered through
the states usually are exempt from state income tax as well.
Tanabe adds that prepaid plans will only work for those that mind the pitfalls. While prepaid tuition plans are one of the safest bets for those attending school in the near future, these plans come with restrictions such as a minimum investment time -- usually three to five years -- as well as limitations on the schools where the money can be spent.
Money invested in state-run prepaid plans can be used
only to buy credits at public colleges in that state. Money invested
in the Independent 529 Plan can be used only at the plan's 274 member
schools.
In both cases, the money is sent directly from the
529 plan to the higher-ed institution without passing through the
plan holder's hands and can't be used for any educational expense
except tuition.
Because of restrictions on where and when the money
can be cashed in, prepaid plans work best for adults who know they'll
be attending a public in-state college and who are planning for
school a few years beforehand.
Kantrowitz of Finaid.org says an alternative option
for adult students who want to return to school soon is to invest
in a prepaid plan today, take out federal loans to cover the first
two years of school and cash in on prepaid credits during the second
half of their college tenure.
Since tuition inflation often outpaces the 6.8 percent
fixed interest rate from the Stafford Loan program -- the largest
federal student loan source -- students can get the biggest bang
for their buck by leaving their money in a prepaid plan for as long
as possible.
Despite the restrictions, Tanabe says, prepaid plans
can be a better investment for adults who have a clear view of their
college path. With today's market conditions, prepaid programs are
providing better returns than college savings plans.
"With the economic turmoil that we're seeing, the guaranteed return is a comfort," Tanabe says.
3. 529 college
savings plans allow broad college selection
If you're looking for a greater choice of colleges, don't fear 529
college savings plans, but approach them with caution, says Kalman
Chany, president of the New York City-based financial aid consulting
firm Campus Consultants Inc. and author of "Paying for College Without
Going Broke."
"With the volatility we've seen in the markets, it's
just too risky to invest in stocks and equities right now," Chany
explains. But "529 saving plans offer different options you can
put your money into, and many of them ... don't involve equities
at all. People who do that get the kicker of tax benefits without
the risk."
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