Did you know that Virginia actually offers four tax-advantaged college savings programs? If you are like most, you are probably aware of the CollegeAmerica program and maybe even the Virginia529 prePAID program. Don't feel bad if you are in the majority though, as many financial advisers aren't even aware that there are more than two options available. In fact, some only think there is one...the one they sell.
The four tax-advantaged college savings plans offered through Virginia529 are the Virginia529 inVest, Virginia529 prePAID, CollegeWealth and CollegeAmerica. There are a number of advantages and disadvantages for each program that I will go into another time. For now, I'll just focus on summarizing each plan.
Of the four programs offered, only one is a prepaid program. This is the Virginia529 prePAID plan. In simple terms, you agree to pay a set amount, either up front or over a set time period, and Virginia529 will cover tuition and mandatory fees for the agreed number of college semesters. For example, let's say that you would like to prepay for eight semesters of school, at a four-year Virginia Public Institution, for your first grade child. At the time of this writing, you could do so with a $62,400 lump sum payment, or a variety of payments over time. (ie: $1,224 per month for 60 months, or $715 per month for 120 months) The prepaid plan offers a defined benefit (semesters of college) for a defined payment. The Virginia529 prePAID plan is offered through Virginia529.com.
The CollegeWealth plan provides one with an affordable and familiar way to save for higher education expenses. Offered through BB&T and Union Bank & Trust, the CollegeWealth plan is an FDIC insured, high yield savings account for college costs. For example, today, while one might only achieve a 0.05% APY in a BB&T eSavings account, the CollegeWealth account at BB&T provides a 2.00% APY. And, like the other three college savings programs, account contributions may be tax deductible, grow free of federal income taxes, and can be withdrawn free of federal income taxes when used for qualified higher education expenses. The CollegeWealth account is setup by the partner bank (at this time, BB&T and Union First Market Bank are the only participating banks) and account owners have the flexibility to save money according to their own timeline or budget.
The most popular plan with the parents I have come in contact with has been the CollegeAmerica plan, and it is not really surprising why. Individuals must work with a financial adviser to set up this plan with American Funds. Once established, the account owner and his/her financial adviser, can choose from several of the American Funds mutual fund options in order to build an investment plan suitable for their goals and objectives. Funds are then invested in stock and/or bond mutual funds in an effort to achieve a higher overall return than that of the risk-adverse CollegeWealth account.
If you ask me though, for those individuals who want to utilize the stock and bond markets to try and maximize their college savings, the better plan is the Virginia529 inVest plan. This is Virginia529's direct-sold college savings program that allows the owner to choose between age-based portfolios and static portfolios. In an age-based portfolio, the exposure that one would have to the stock markets would be greater at first, when the need for the funds are still a long way out, and then it would begin to decrease the stock market exposure as the anticipated need for the college funds approached. This type of strategy would have been very beneficial for those who had children going off to college in say, 2008 - 11. For those who do not care for an age-based portfolio, a variety of static portfolios (those that will not change as the child approaches college) are also available through the inVest plan.
What makes the inVest plan more appealing than the CollegeAmerica plan is the difference in expenses. In most cases, investments in the CollegeAmerica plan have up-front sales charges of up to 5.75%. A sales charge (also known as a load fee) is basically an up-front commission paid to the financial adviser, and his or her broker/dealer, for selling that mutual fund. So when you invest $10,000 in a mutual fund that has an up-front 5.75% sales charge, your actual invested amount is only $9,425. With the Virginia529 inVest plan, you pay no up-front sales charges, so 100% of the money you put in gets invested.
I'll talk more about this difference in the future. For now though, I just wanted to let you know that a better option exists. One that your financial adviser probably hasn't told you about.
For more information, you can visit www.virginia529.com to learn about each plan.
Kevin Warman, CIMA®, RMA®
(last updated 04.15.2015)