Working adults weighing their money-saving options for an encore college appearance shouldn’t exclude prepaid tuition and savings plans.
Adult learners frequently overlook prepaid plans like those that take advantage of Section 529 of the U.S. tax code, says Kelly Tanabe, author of “501 Ways for Adult Students to Pay for College.”
“When adults think about saving for college, they tend to think a 529 plan only applies if you’re sending a child to school,” Tanabe says. “Even if you only have a few years, a [prepaid] plan can be a good vehicle because it’s guaranteed and your money isn’t taxed.”
To be sure, many older workers contemplate continued education and quickly hit the books after deciding to return to school. But for those who plan several years ahead, below are four easy methods of saving for college.
Denise Hickmon, a 40-year-old administrative assistant from Washington, D.C., found a way to quadruple her money without risking a penny. She invested $1,000 in an Individual Development Account, a matched savings program offered through the nonprofit Corporation for Enterprise Development, or CFED, and gained an additional $3,000 to help pay for her final semester at Catholic University.
“I make about $38,000 a year and have four children, so I couldn’t pay for tuition on my own,” Hickmon says. “I was applying for scholarships, but the money was running out. The (IDA) program helped me to graduate.”
Available in more than 540 locations across the U.S., IDA programs help low-income families build long-lasting financial assets by matching savings of up to $1,000 to be used for education, career training, a down payment on a home or as start-up capital for a new business.
IDAs are funded by a wide range of nonprofit organizations, private companies and government agencies — the Department of Health and Human Services being one of the largest sources. These saving instruments emerged in the early 1990s as a way for low-income households to permanently break the cycle of poverty.
Modeled after 401(K) matched-savings programs, IDAs are offered in 19 states, according to the Federal Deposit Insurance Corp. They also are administered through a wide array of community and economic-development groups like the Washington, D.C.-based CFED, various local governments and select financial institutions, including banks and credit unions.
Before receiving the savings match, IDA enrollees are required to make regular contributions to the account for a minimum of six months and take free financial literacy classes that teach basic savings and asset management skills.
Once enrollees have reached their savings goal or the $1,000 maximum, the program sponsor matches it with 100 percent to 600 percent of the initial amount and sends the money directly to the school or bank.
Though IDA eligibility requirements vary from program to program, most IDAs cater to families with limited assets, usually totaling $10,000 or less, and with collective incomes of approximately 200 percent of the poverty threshold or less, says Rochelle Watson, CFED’s senior program manager. That means a single mom with four children like Hickmon must earn less than $55,165 a year in order to open an IDA, according to CFED rules.
“(IDAs) serve more than 80,000 savers per year,” Watson says. “We keep a lot of people out of debt.”
A directory of IDA programs across the nation is available at the Corporation for Enterprise Development’s site.
Two unfortunate byproducts of a tanking economy are state education budget cuts and skyrocketing tuition, and 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 plan is 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 only be used to buy credits at public colleges or universities in that state. Funds invested in the Independent 529 Plan can only be used 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 for 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 institution 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.
Kalman Chany says not to fear 529 college savings plans but to approach them with caution, if you’re looking for a greater choice of colleges. Chany is 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. “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.”
Offered through every state and the District of Columbia, 529 college savings plans come with the same federal and state tax advantages as prepaid plans. But students can choose from any accredited 2- or 4-year institution in the country. And they can be used for any qualified educational expense, such as books and room and board — not just tuition.
Though 529 college savings plans aren’t entirely risk-free investments, most plans, such as the Virginia Education Savings Trust, offer conservative bond and money-market investment options, giving short-term savers the tax advantages with limited risk.
Those who crave choice without gambling on their investment should stick with risk-free, low-gain savings vehicles, says Tanabe, the college-finance writer.
“Since adults usually have a good sense of when they’ll be attending school, they can purchase a bond or CD timed to their enrollment date and gain a little bit that way,” Tanabe says. “You want to make sure you have that money in two or three years, so stay away from stocks and mutual funds.”
One risk-free way that returning adults can keep the federal tax benefits that accompany 529 plans without limiting their choice of schools is to purchase a CollegeSure CD offered through the College Savings Bank in Princeton, N .J.
Acting as a compromise between prepaid plans and 529 college savings plans, CollegeSure CDs are certificates of deposit whose annual percentage yields are tied to the rise in college costs.
Invest $37,208 — the amount required to buy one year of college today — and you’ll be able to attend your first year for that price at any accredited institution in the country regardless of how much the tuition has risen since buying the CD.
The catch is that CollegeSure only saves money for those attending pricey private schools. For undergrads at schools like George Washington University in Washington, D.C., where the 2007-08 tuition price was $39,240, a CollegeSure CD bought for $2,032 less is a steal even if cashed in the next year.
For those attending schools such as the University of Florida, where tuition and fees for one year come to $3,094, CollegeSure account holders can use their funds to pay for a year of school, then spend the rest on other qualified educational expenses like room and board or a computer.
If there is CollegeSure cash left after educational expenses, account holders can either roll over their funds for the next school year, or they can pay a 10-percent penalty on account earnings and pull their money out for noneducational expenses.
For example, parents who invest $100,000 in a CollegeSure CD but only have tuition and educational expenses that total $40,000 would lose 10 percent on any earnings generated on the remaining $60,000.
No matter which savings vehicle you choose, Tanabe says the biggest financial risk for adult learners isn’t choosing the wrong savings plan. It’s taking on debt for a degree that doesn’t pay off.
“Delaying college for a few years while you save is much less risky than taking out a loan for a degree that might not increase your income,” Tanabe says.
The first step to risk-free college saving is simply making sure that the degree is worth the financial investment, he says. “Before looking at how to save, you really need to consider: What’s the payoff to getting this degree?”
Christina Couch is the author of Virginia Colleges 101: The Ultimate Guide for Students of All Ages.