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.
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 They usually save money on state taxes, and when the money is withdrawn for college, provided it is for an accredited school, it can be used to meet any qualified educational expenses.
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.
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.