Military Members Saving for a Child's College Education

Giving your kids a college education is extremely important.  Like any investment, the best time to start planning and saving is now.  The military provided me with the resources to get my bachelor’s and master’s in business administration.  There are many options to properly save for your kids’ college education.  As in all proper financial planning, avoiding taxes is key.  Here are the main ways to save for a child’s college education.  If you’re a civilian, skip the Post 9/11 GI Bill.   

·         Post 9/11 GI Bill – One of the major changes when the Department of Defense switched from the Montgomery GI Bill to the Post 9/11 GI Bill was the ability to transfer the benefits to your spouse or qualified dependent.  The Post 9/11 GI Bill can pay for 36 months of tuition, provides a housing and book stipend.  Military members do not have to put money into this fund, but they must meet minimum Time-in-Service requirements.  As long as Tuition Assistance (TA) still pays for 100% of tuition (some Master’s programs will cost more than the TA provides) while on active duty, then many military members will be able to transfer their benefits to their children[1].  Transferring your benefits does come with a 4-year active-duty service commitment—which I’ve heard is incredibly hard to get out of.  

·         529 Plan – The most common method for parents to save for their kids’ education is to a 529 Plan.  These are state-sponsored programs that allow you to invest your money and not pay taxes while your invested money grows.  If the child uses it for qualified education expenses, the withdrawals are also tax free.  You can put $14K a year into a 529 plan.  If your extended family is looking for birthday and Christmas gifts, they can send you money to put into the child’s 529 plan.  You can invest in stocks, bonds, or mutual funds (or any investment) and it will grow tax free; however, this does expose your savings to market risk.  Once your child is ready to withdraw the money, you may want to read on tips how to maximize 529 plan deductions.  For example, for a couple making $160K, or $80 for a single parent, the first $2,500 of qualified education expenses are tax deductible under the American Opportunity Credit ($160K couple, $80K single, $2,500)[2].  Little tricks like that will help maximize the money you saved.  The Security and Exchange Commission has a great starting point for all things 529 plans. 

·         Scholarships – As a parent you should thoroughly research scholarships.  My parents provided me with absolutely no information regarding college.  I didn’t even know that scholarships existed.  Finding scholarships from schools and degree types will help you focus your efforts in preparing your children for college.  For example, many colleges have unfilled scholarships for females in golf, tennis, and most of the STEM degrees (science, technology, electronics, and mathematics).

·         Child ROTH IRA – A more obscure way of saving for your kids’ college education is to start a child ROTH IRA.  It works very similar to a 529 Plan, but the child doesn’t have to use it for a college degree.  It’s simply an IRA that you can use to avoid taxes when you withdraw the money for qualified education expenses.

NOTE:  Qualified Education Expenses: tuition, fees, books, supplies, and equipment and an eligible institution

This blog post assumes that you want to save for your kids’ college education.  Some parents don’t believe in paying for their kids’ college education.  What are your thoughts?  Should parents pay for college education or should kids have to “work for it”.

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[1] http://www.benefits.va.gov/gibill/post911_transfer.asp

[2] https://www.irs.gov/uac/American-Opportunity-Tax-Credit

529 College Education Plan

529 plans are tax-deferred accounts used to pay for college expenses for a beneficiary (usually a child/grandchild) ran by states or education institutions. An investment in a 529 plan is invested in stocks and bonds and will grow tax free until the beneficiary is ready to use the money. The deductions are tax exempt if used for qualified college expenses. For the most part, 529s are a great way to save for your child’s college education but there are some considerations to think about before investing in one.

Benefits:

·         Tax Advantages: If you’ve read more than one article from my blog, you know I’m an opponent of taxes and I focus on helping people pay the minimum amount of taxes as possible. The money you invest in a 529 will grow tax free and when your beneficiary is ready to use the money for qualified college expenses, the earnings will also be tax free. 529 contributions are considered gifts so you’ll be maxed out at $14K a year in annual contributions to a 529.

·         Better Returns: 529s plans are run by States and in most cases have better returns than a simple savings account or treasury bonds. A parent starting a 529 when the child is born has ~18 years to save for the child’s college education. Some states do extremely well and provide amazing rates of return.

·         Realistic Program Management: Unlike most programs designed by the government, the 529 program is realistic and versatile. For military members this is especially important because you can switch 529 programs state to state depending on which state you live or are stationed in. You have an opportunity in picking which state has a better rate of return. For all parents, the 529 can be transferred from family member to family member. If one child doesn’t use it then you can pass it to another child or to a grandchild.

Considerations:

·         Sole Purpose: The sole purpose of a 529 plan is to help pay for a beneficiary’s college education. If you’ve saved more than the cost of a college education and have to liquidate the account then you will be penalized. If your child chooses not to attend college or receives a scholarship then you will have to liquidate and be penalized. The penalty for not using the funds for qualified education expenses is a staggering 10% so, if possible, only save enough for the education your beneficiary(s) can use.

·         Financial Aid Concerns: I try not to expose my political ideologies on my blog but financial aid and social programs are being abused by many people and not for its original intent. Financial aid for college is a common place to find such abuse. Many abusers receive more social welfare money for going to college and use financial aid with little intent on graduating college. For those parents who tried their hardest to save for a 529 but will still look for financial aid for their child, may be impacted in getting financial aid because the 529 will be part of the parent’s “net worth” calculation (a.k.a. Expected Family Contribution[EFC]) even though the 529 can only be used for college expenses. A 529 isn’t necessarily a part of the parent’s wealth as it is used for in the EFC calculation.

·         Limited Investment Options: I mentioned above that 529 plans have better returns than a savings account or treasury bonds but there are still limited investment options. You are limited to the State ran 529 plan for the State you choose. Some states offer deals for their own residents but the options are still limited.  

·         Post 9/11 GI Bill: The Post 9/11 GI Bill allows military members to transfer up to 36 months of education benefits to a family member. I received my Bachelor’s and Graduate’s degree using the Montgomery GI Bill (pre-9/11 GI Bill) and haven’t used any of my post 9/11 GI Bill benefits. I can transfer all 36 months to my children (though it comes with a 4-year Active Duty Service Commitment). So going back to the sole purpose consideration, be careful how much you invest if you’re planning on using the post 9/11 GI Bill for your child. You may have to liquidate more than expected and get penalized 10%.

529s are basically run like mutual funds. My #1 choice for all information on mutual funds is Morningstar.com. They have a great 529 Center on their site here: http://529.morningstar.com/state-map.action

Be careful when you’re doing a simple search for 529 information.  Some of the State-ran plans are worth several billion dollars and it’s a big business. Like all investments they want your money so a lot of Google searches will be advertisement-based over research based. Like I said above, I use Morningstar.com to search through 529s.