Groups Makes College Less Painful for Parents

By Samantha L. Quigley
American Forces Press Service

March 21, 2007 – Parents of even young children often wonder how they'll pay for college tuition, but military service organizations are taking some uncertainty out of the equation. The Military Officers Association of America and the United Services Automobile Association both offer college savings plans to help servicemembers defray the cost of college educations long before the bill arrives in the mail.

MOAA and USAA also are members of America Supports You, a Defense Department program highlighting the ways Americans and the corporate sector are supporting the nation's servicemembers.

Both organizations offer state-sponsored 529 College Savings Plans, which are available in nearly every state.

MOAA's "Degrees of Success" plan, chosen for its low fees and expenses, has been available to all servicemembers since November, Phil Dyer, MOAA's deputy director of financial education, said. It also offers a waiver of the typical $3,000 initial fee. The waiver requires enrollment through the MOAA Web site and participation in a $50 automatic payment plan.

Dyer, who is also a certified financial planner, said the frequency of that payment is flexible.

The $3,000 waiver is automatically available to all enlisted personnel. Officers wishing to take advantage of the benefit must be MOAA members, however, Dyer said.

Investing in a 529 plan is much like investing in mutual funds, Dyer said. "Some are fixed income choices, which may return 4 percent a year, but most of them are tied to a basket of stock market mutual funds," he added.

If an investor doesn't want to play the market when it comes to paying for college, there's an option that will put minds at ease, Dyer said. "Most 529 plans will have what is called an age-weighted option, ... kind of like a fire-and-forget missile," he said. "You just pick the maturity year that you want and then they will automatically adjust the investments as you draw closer to that to make it more conservative."

The 529 plans also offer benefits beyond defraying the cost of college before the child begins classes. For instance, withdrawals used for qualified educational expenses are state and federal income tax exempt, Dyer said. Qualifying expenses include participation in accredited trade school programs, undergraduate study at two- and four-year schools, and graduate programs, Dyer added.

Owners of these savings plans -- generally parents -- are free to change the beneficiary once a year with no penalty, he said. That feature is useful if a beneficiary child, for whatever reason, doesn't use the money saved.

"If you get to the end of the line and nobody's used the money, ... you (can) take the money out for a nonqualified education expense and it's treated just like a premature (individual retirement account) distribution," Dyer said. "What that means is ... that anything you take out is going to be added to your taxable income for the year."

The money also incurs a 10 percent "non-qualifying withdrawal" tax penalty, he said.

While USAA offers a similar plan, the terms are a little different, June Walbert, a certified financial planner with USAA, said. USAA members can open an account for as little as $250 with a subsequent $50 per month contribution. The organization also offers an additional feature to help boost a 529 College Savings Plan's bottom line.

"Our program is linked with the Upromise rewards service, which means that if you register a credit card or a debit card with Upromise -- without any catches or without any fees -- if you shop and use certain products, ... then you can get Upromise rewards credited directly to your 529 College Savings Plan," she said. The Upromise program is connected with thousands of retailers and restaurants.

In addition to the 529 College Savings Plan, USAA offers another option, the Coverdell Education Savings Account. Money in a Coverdell account can be used for education beginning at the elementary level and continuing through higher education, Walbert said.

"So if the parent starts a Coverdell Education Savings Account when the kiddo is born, a few years later they can start withdrawing the money after it's had some time to percolate, if you will, in the market," she said.

The Coverdell plan has slightly different guidelines from 529 plans, she added. There is a $2,000 a year contribution limit, and there are income parameters imposed by the Internal Revenue Service. "So you can't make too much money and still qualify for the Coverdell Education Savings Account," Walbert said.

One form of college savings plan that Walbert cautions parents about is the 529 Pre-paid Tuition Plan, which is valid only in the state it's linked to. It's a little riskier, she said, and that risk has more to do with a child's choice of schools than stock market fluctuations.

"None of us know where our kids want to go to school, number one," Walbert said. "With a 529 Pre-paid Tuition Plan, (investors) are buying tuition credits for the future at today's rates, ... and the requirement is that you go to school in that state."

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