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Health & Fitness

Saving for My Child's College Education

Financial expert Stan Molotsky outlines the financial strategies behind saving for college.

Paying for college is like adding a second mortgage, but unless the notion of nationwide student loan forgiveness catches on, it's a necessary way to spare your children the burden of a decade or more of personal debt.

Once you've determined how much it could cost to send your children to college, develop an investment plan to accumulate the necessary funds. Here are some popular strategies.
 
Universal life insurance policies build cash value through regular premiums and grow at competitive rates. These policies carry a death benefit that, in addition to providing cash to your heirs in the event of your death, makes them tax-free.
 
Money invested in these policies is typically withdrawn through a low- or no-interest loan against it, although such withdrawals may reduce their death benefit amount.
 
Zero-coupon bonds represent the ownership of principal payments on U.S. government notes or bonds. Unlike traditional bonds, zero-coupon bonds make no periodic interest payments. They are purchased at a substantial discount and pay face value upon maturity.
 
The value of a zero-coupon bond is subject to market fluctuation; its price tends to be more volatile than that of a bond that pays regular interest. Although no income is paid on a zero-coupon bond, its inherent interest is still taxable annually as ordinary income.
 
Mutual funds are established by investment companies by pooling the monies of many different investors into a diversified portfolio of securities. The value of mutual fund shares fluctuates with market conditions, so shares may be worth more or less of their original cost when sold.
 
Mutual funds are sold by prospectus, which lays out information about the investment company as well as about the fund, its objectives, risks, charges, and expenses. Be sure to read the prospectus carefully before deciding whether to invest.
 
The value of the Independent College 500-Indexed Certificate of Deposit, or IC 500, is determined by the College Board index of college inflation based on a survey of costs at 500 independent colleges and universities. IC 500-indexed CoD's are relatively new funding vehicles offered by a few savings institutions.
 
State- and college-sponsored Section 529 Plans, also known as Qualified Tuition Plans, offer higher contributions than do Coverdell IRAs as well as tax-deferred accumulation. Once withdrawals begin, they are tax-exempt as long as the funds are used to pay for qualified higher education expenses.
 
There are generally fees and expenses associated with participation in a Section 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments in Section 529 plans. The tax implications of a Section 529 savings plan should be discussed with your legal and/or tax advisor because they can vary significantly from state to state. Most states offer their own Section 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.
 
Before investing in a 529 savings plan, please consider carefully its investment objectives, risks, charges, and expenses. Official disclosure statements and applicable prospectuses contain this and other information about the investment options and underlying investments. Get them by contacting your financial professional, and read this material carefully before investing.

Stan Molotsky is President and CEO of the Voorhees and Collingswood-based SHM Financial Group. He hosts The Molot$ky Money Hour live Monday at 10 am on WWDB-AM 860 in Camden, Burlington, and Gloucester Counties, and Saturday at 7 am on WWOB-AM 860 in Ocean and Monmouth Counties.

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The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. Its content is derived from sources believed to be accurate.

Neither the information presented herein nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. You are encouraged to seek tax or legal advice from an independent professional advisor.

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