What is a College Savings Plan?

Tricia Christensen
Tricia Christensen
Tricia Christensen
Tricia Christensen
Local savings and loan associations can set up college savings plans.
Local savings and loan associations can set up college savings plans.

A college savings plan can refer to a number of different strategies for saving money for college, usually for a person’s children. These can vary depending upon the state or country in which a person lives. Some of them have tax incentives or special features that make them attractive.

In Canada people might save for college by participating in a registered education savings plan. This can be opened once a child is born and will help meet college expenses when a child is college-bound. Those interested in these plans can investigate them at the Social Development Canada website.

Many parents start saving for their children's college when they are very young.
Many parents start saving for their children's college when they are very young.

In the US, there are several methods to put a college savings plan into place. One common way people invest is through state 529 plans. These are available in each state and may be subject to special state laws. They usually save money on state taxes, and when the money is withdrawn for college, provided it is for an accredited school, it can be used to meet any qualified educational expenses.

Parents who deposit even modest amounts can help ensure that college funds are available when their child when she turns 18.
Parents who deposit even modest amounts can help ensure that college funds are available when their child when she turns 18.

There are usually two types of 529 plans, separated into pre-payment and savings plans. Pre-payment plans pay college tuition ahead of time, usually at a state school. Savings plans stockpile money, which is then invested in things like stock, mutual funds or bonds to grow.

The college savings plan that is not a pre-pay sort has proven problematic for some people. Some plans were highly aggressive in investing and this led to significant loss of funds for many people in the late 2000s, due to the economic recession. Many people lost a great deal of money that they had hoped would be available for their children’s education, and they had also paid fairly high fees to enroll in the plans.

The sooner parents start saving, the easier it will be to pay college bills in the future.
The sooner parents start saving, the easier it will be to pay college bills in the future.

A related type of college savings plan into which some people invested, and continue to invest is Coverdell Educational Savings, which may also be called Educational IRAs. Instead of being restricted to state approved investors, as the case with 529 plans, these college savings plans can be opened by brokers or mutual fund companies. They too, can be subject to losses when the stock market falls, but they are not subject to as many fees as 529s. On the other hand, educational IRAs usually don’t have the same income tax advantages, and people investing in them must not exceed certain income thresholds.

There is risk associated with 529s that are not prepaid ones, and with Educational IRAS. Some people would rather stockpile money to save for college where risk is much lower. It is very easy to set up a college savings plan at a bank or a savings and loan. Storing money in a savings account means people can expect minimum growth, and they won’t have the same tax advantages. Yet the amount of money saved cannot decrease unless a person takes money out of the account.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent wiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent wiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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Discussion Comments

rosequartz

Friends of mine had a large family with six kids. They were not able to save any money in a college savings 529 plan for any of their kids as they worked hard just to make ends meet.

I'm not judging their family but in retrospect, if they had made the effort to even save a little bit for each child, maybe their kids would have gone on to college. Out of the six, not one of their kids finished a bachelor's degree. I wonder if it was because the kids had to figure out their own way to get through school and the costs were just too overwhelming.

ninetydegree

The prepaid college savings plan really helped our large family prepare to send several kids to college at the same time.

If we hadn't prepared when they were all little, either we would be looking at a mountain of debt today or they would be.

When you save small amounts over a period of 18 years, it seems like it won't be enough. But the amount we were able to put away for each child has been more than a blessing.

This also helps the children feel motivated to go to college since the money is there waiting for them and they have all felt compelled to go as far as possible with their education.

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    • Local savings and loan associations can set up college savings plans.
      Local savings and loan associations can set up college savings plans.
    • Many parents start saving for their children's college when they are very young.
      Many parents start saving for their children's college when they are very young.
    • Parents who deposit even modest amounts can help ensure that college funds are available when their child when she turns 18.
      Parents who deposit even modest amounts can help ensure that college funds are available when their child when she turns 18.
    • The sooner parents start saving, the easier it will be to pay college bills in the future.
      The sooner parents start saving, the easier it will be to pay college bills in the future.