If you have been harbouring dreams of college, or have been wondering if you will be able sufficiently to send your kids to a university of their choice, this is post on education savings may be suited to your needs. Irrespective of market conditions education costs do not seem to have dropped as much. Even today affording good higher education requires planning and meticulous savings for college.
The 529 College Savings Plan & Other Options
The new 529-college savings plan, has meant that it might be beneficial to stay near home as States offer deductions to residents contributing to their state’s plan. This however does not mean that you should not venture out of your home state for college. It might just so be that the other educations and non-educational benefits of moving to a university in another state, far surpass the tax incentives offered by your state. In addition to this the next question that needs to be answered is that should you invest your funds in your states 529 plan or are there better options out there These are some of the things, which a college saver should look out for:
- Cheap Funds: This might sound a tad bit absurd, but historically it has been proven that education funds, which do not cost an arm and a leg, to get into have a better chance of outperforming the index. Having said this does not necessarily mean that the fund will out perform. That could depend on a number on factors such as investment decisions, calls made by the fund manager and other external market factors. However what does remain a certainty is of course the amount of money you pay. If however you take an expensive fund, apart from the entry cost, there will be administration expenses attached by the 529 plan plus brokerage, if you are investing through a broker etc. This can greatly hamper your overall return.
- Diversification: Here is another important consideration. Diversification basically means spreading your eggs across several baskets. You could, by diversifying, expose your self to international college saving funds and small caps, which in turn usually offer greater returns in the long run. This will also reduce your overall exposure and thereby dependence to Domestic Blue Chips and large caps.
- Time Frame & Risk Tolerance: It is important to remember the time frame you have in mind for your college savings plan. If you are working a fairly large time from, it might be prudent to initially invest in small caps and international funds as these yield a higher return in the short term. If you only have a few years to go prior to the date the individual or yourself having to join college, then it may be a safer bet to invest your education savings in large caps and blue chips.
Having mentioned the foundation guidelines for a good education savings plan, it is also worth mentioning that unless you have used the right mix of funds and have properly diversified you could end up losing money. It is essential that you have strong base of college funds around which you can place several satellite funds to help obtain your overall objective. However, it is essential that you or your broker chooses these funds with ample care and after having done ample research.
Once again prior to making any investment decision remember to consult an expert in the field and ensure that you have weighed all your options accordingly.
Reference:
- College Savings 101 – Saving for College
