Reader Question: College Savings Options

If you have questions about your finances, you are not alone. In fact, here at Your Finances Simplified we often receive financial questions from our readers.

For example, Erika, has a question about college savings options.

I have a toddler and I am looking into college savings.  Some appear to only be savings plans with little to no interest.  What, if any college savings plans do you recommend?

The Answer

Erika that is an excellent observation! Many college savings plans offer very little incentive in the way of interest compensation. This is largely because most college savings plans rely on tax benefits to justify their merit as an investment vehicle. These tax advantages are a little more difficult to quantify than straightforward interest rates and can be of greater benefit to some than to others because of differing income levels. After all, each of us is in a different financial situation.

I’m not in a position to recommend one college savings plan over another. There are just too many to review properly and with so many federal and state sponsored plans in the mix, combined with too many personal financial variables, a one-size-fits-all response is not possible.

Basically, you need to ask yourself how much risk you are willing to take for a better return. If safety is your primary concern, look into your state’s Section 529 Prepaid Tuition Plan. They don’t offer much in the way of interest, but they do provide guarantees against inflation. This is a valuable benefit given the average 6 percent inflation rate for college tuition. This is the equivalent of getting a 6 percent return, so it isn’t a bad option.

Another option is the Cloverdale ESA. The Cloverdale allows you to save up to $2000 annually for each of your children; it is a great choice for anyone looking for wider investment options with potentially greater rates of return. Another benefit of the Cloverdale ESA is greater spending flexibility. You can use the money for K though 12 tuition if you choose.

Since your child is a toddler, you will have some time to sort this all out. Find out what you can about your state’s college savings plans and decide which one, if any, is appropriate for you.

My best advice is that you not get hung-up on handles. What a savings or investment plan is called doesn’t mean a damn thing! Regardless of where you put your money, it can be used to fund your child’s education.

Building equity in a home, investing in stock, starting a business … all these things have the potential to pay your toddler’s college education. It doesn’t have to be defined as a “college savings plan” to be a college savings strategy. Okay!

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