Plans help with college sticker shock

Business
By Alice Felts
Source: Fauquier Times-Democrat
WEDNESDAY, NOVEMBER 12 2008

In Virginia, college tuitions and fees increased eight percent in 2007-08 in public two-year colleges and seven percent in public four-year colleges. Both rates of increases were higher than the national average.

Tuition and fees for private four-year colleges in Virginia, however, were below national averages with an increase of five percent.

College costs have been outpacing inflation for a number of years; higher education's harshest critics claim that campuses across the nation are out of control.

On top of that, as The Washington Post reported this week, lenders are telling colleges that they have no money for student loans.

What's a parent to do.

Virginia, like most other states, offers college savings plans, but potential investors — parents and grandparents, mostly — many of whom have watched their 401(k)s virtually disappear, are increasingly worried about the safety of the long-term savings accounts.

Just as there are investors with different tolerances for risks, there are college savings plans to match.

The Virginia Savings Plan is an independent state agency which administers four options under Virginia's Internal Revenue Code Section 529 qualified tuition program: the Virginia Prepaid Education Program (VPEP), the Virginia Education Savings Trust (VEST), CollegeAmerica and CollegeWealth.

The most noteworthy advantage of these investment vs. other investment instruments is that they are tax free. Money put into the accounts is not taxed. Money taken out of the plans — provided it is used for applicable educational expenses — is not taxed, either.

While all of these plans have favorable tax advantages, before making a decision on any of these plans, potential investors need to ask several questions.

When do I need the money? Do I want a guarantee of funds or do I want to be aggressive in my approach? What are my tax advantages? Do I want to manage my own investments or use a professional financial adviser? Do I want to diversify my investments?

The VPEP plan is a payment plan contract which locks in future college costs at today's prices for newborns through ninth graders who will attend Virginia public colleges. The money can also be used for private and public universities in the U.S., but, private schools and those outside Virginia, do not have locked in tuition rates.

According to customer service representative Schnel Smith, this program is based on the relatively stable Institutional Money Funds Index, and the investor can adjust his or her payments, if needed.

There are some drawbacks to VPEP. The money cannot be used for such items as lab fees, room and board, transportation, or books.

The rate of return has roller-coasted since the funds' 1996 inception. Starting out at a four percent yearly rate of return, it plummeted to a quarterly rate of 0.66 percent in April 2004.

Since its lowest rate, it has climbed and descended again, finally resting at 2.12 percent in July 2008.

The remaining three option plans, unlike the VPEP, can be used for tuition and fees, room and board, and textbooks and supplies.

VEST is a good option for those who want to choose their own mix of investments from 16 portfolios. The money can be used for any accredited educational institution that is eligible for U.S. Department of Education financial aid programs.

CollegeAmerica is also a portfolio-driven savings plan. It offers a choice of 23 mutual funds through American Funds. Investors can choose a single fund or a combination of funds, but the plan is available only through personal financial advisers.

The most conservative plan is CollegeWealth., which is available only through participating banks, locally The Rappahannock National Bank.

CollegeWealth, the newest of the four options, is guaranteed by the FDIC (Federal Deposit Insurance Corp.) up to $100,000 in combined individual holdings. According to Anakristen Fetters, personal banker at Rappahannock National. A college savings account or Certificate of Deposit (CD) can be opened with a minimum of $250. Two different tiers of interest rates are used, depending on the account amount.

Fetters said the bank began the program six months ago and it is quite popular.

"Most investors like the fact their deposits are FDIC insured. They like dealing with a community bank, coming in and personally making their contributions."

The money in the CollegeWealth account must be used for higher education. If the person does not go to college, the money can be transferred to benefit another family member's education.

For more information, visit www.virginia529.com.

E-mail the reporter: afelts@timespapers.com.

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