Typically, when military families think about paying for college, the GI Bill comes to mind. While this is a great option for eligible families, it’s not the only option. As such, we’ll use this article to outline the best college-savings options for military families.
Specifically, we’ll discuss the following:
- Post-9/11 GI Bill for Military Families
- Yellow Ribbon Program
- State-Sponsored 529 Plans – Prepaid Tuition
- State-Sponsored 529 Plans – Savings
- Roth IRA as an Emergency Option
- Final Thoughts on College-Savings Options for Military Families
Post-9/11 GI Bill for Military Families
Overview
This VA education benefit constitutes the gold standard of post-service education benefits. While full eligibility percentages typically require three years of active duty service, you may be eligible for a reduced benefit percentage if you’ve served on active duty for at least 90 days after Sept. 10th, 2001.
Assuming 100% eligibility, troops can receive 36 months of the following benefits through the Post-9/11 GI Bill:
- Tuition and fees (paid up to the in-state, public school maximum)
- Monthly housing allowance
- Book stipend up to $1,000 per year
And, though most veterans personally use their benefits, certain military members qualify to pass their GI Bill to family members (i.e. spouse or children). In particular, eligible veterans can transfer their Post-9/11 GI Bill benefits to a qualified dependent so long as:
- You’ve completed at least 6 years of service on the date your request is approved, and
- You agree to add 4 more years of service, and
- The person getting benefits has enrolled in the Defense Enrollment Eligibility Reporting System (DEERS)
Pros and Cons
From a financial perspective, the GI Bill represents the absolute premier way to pay for college education. Very few – if any – other benefit programs both pay for 36 months of tuition and provide a housing allowance while enrolled in classes.
But, this route also has two primary drawbacks. First, if you have multiple children, you may struggle to cover all of their college expenses with the GI Bill. Yes, you can transfer a portion of your benefits to multiple children (e.g. 12 months of benefits to three children). But, completing a full bachelor’s degree in this amount of time poses a tremendous challenge.
Second, while the GI Bill covers the cost of in-state, public tuition, it likely will not completely cover more expensive, private-school tuition. Fortunately, though, the next option – the Yellow Ribbon – helps address that problem.
Yellow Ribbon Program
Overview
This program serves as a bridge financing mechanism for military family members using their Post-9/11 GI Bill benefits to attend a more expensive, private university. For these schools, the standard GI Bill payments do not cover the full tuition. To fix this gap, the VA created the Yellow Ribbon program.
Schools with tuitions greater than the GI Bill maximum can enroll as Yellow Ribbon participants. Students with 100% GI Bill eligibility can apply for a Yellow Ribbon slot at these schools. And, as Yellow Ribbon participants, the schools offer to pay a set amount, above and beyond the GI Bill contribution, and the VA matches this contribution, meaning families need to pay less – or nothing – out of pocket to attend these schools.
Pros and Cons
The major advantage to the Yellow Ribbon is this increase in tuition. If a private university offers to pay $10,000 in Yellow Ribbon benefits, the VA will match that amount, meaning you receive an extra $20,000 above your GI Bill. In many cases, this top-up more than covers a student’s full tuition.
But, the same drawback to the GI Bill exists with the Yellow Ribbon program. That is, the benefits may not be enough to cover college costs for an entire family. Continuing the above example, even if you provide three children 12 months each of GI Bill with Yellow Ribbon eligibility, that likely won’t pay for all of their education.
What Other Options Exist?
While the Post-9/11 GI Bill should absolutely serve as the foundation for college savings in a military family, you typically must supplement these benefits with additional savings. In the remainder of the article, we’ll outline three other college-savings options for military families.
State-Sponsored 529 Plans – Prepaid Tuition
To encourage saving for a child’s education, Congress authorized the Qualified Tuition Program (QTP). Most people refer to the QTP as a 529 plan, as Section 529 of the Internal Revenue Code defines the program. But, while the IRS authorizes this program, individual states sponsor 529 plans. Currently, all 50 states and Washington, DC offer their own 529 plans.
Two different types of 529 plans exist: 1) prepaid tuition plans, and 2) education savings plans. We’ll discuss both options in this section and the next one.
Overview
With prepaid tuition plans, account holders purchase units or credits at participating universities for future tuition and mandatory fees. But, here’s the advantage: you can buy these future credits at today’s prices. For parents concerned about dramatically increasing tuition costs, prepaid tuition plans allow you to lock-in tuition at today’s rates.
Pros and Cons
As stated, a prepaid tuition plan allows you to prepay for tuition and mandatory fees. But, these plans typically do not allow room and board prepayment. And, account holders cannot prepay tuition at elementary or secondary schools – only higher education.
Furthermore, not all colleges and universities participate in these plans (typically, only public, in-state schools do). Accordingly, if this option interests you, research A) what universities participate, and B) what residency requirements you must meet to qualify.
State-Sponsored 529 Plans – Savings
Overview
This is the more common 529 plan option. With education savings plans, individuals can open a tax-advantaged investment account to save for a beneficiary’s future education costs. Account holders can generally choose from a range of investment options, depending on the specific plan. Most states offer a variety of mutual funds, exchange-traded funds, money market funds, and target-date (i.e. automatically re-balancing) funds.
Account beneficiaries can take education savings plan withdrawals tax-free so long as they use those funds for qualified education expenses.
Pros and Cons
As with prepaid tuition plans, education savings plans can be used to pay for higher education tuition and fees. But, these accounts let beneficiaries use account proceeds at any US college or university (and select international ones, as well). Additionally, education savings plan proceeds can be used to pay for room and board.
Education savings plans also offer far more flexibility when it comes to elementary and secondary education. Currently, funds from these plans can be used to pay up to $10,000 per year per beneficiary for tuition at any elementary or secondary school (public, private, or religious). But, account holders should also recognize that account contributions will have less time to grow tax-free if you withdraw them for elementary or secondary school rather than higher education.
Roth IRA as an Emergency Option
Overview
This final option doesn’t qualify as a college-savings option, per se. But, a Roth IRA can serve as an outstanding back-up college-savings option for military families. With these retirement accounts, you contribute after-tax funds. Then, any contributions and associated investment growth can be withdrawn tax-free in retirement (generally at age 59 ½).
But, Roth IRAs, due to this after-tax feature, provide military families significant financial flexibility. While account holders must pay taxes and a penalty on early withdrawals of earnings, you can always withdraw contributions without taxes or penalties. Accordingly, military families can consider these Roth IRA contributions a source of college funds.
Pros and Cons
The main advantage to this option is the flexibility. Roth IRA contributions can always be withdrawn, providing account holders an easily accessible source of funds.
But, this advantage also represents the primary disadvantage to using a Roth IRA to pay for college. Once you withdraw funds from an account, you no longer earn tax-free interest and dividends on those investments. This has a two-fold negative impact on your retirement: 1) you remove contributions, and 2) you lose the future growth potential of those contributions.
Additionally, while you can withdraw as much as you want in contributions, you can only contribute up to the annual limit. For example, say you withdraw $60,000 from your Roth IRA to help pay for a child’s college. If the annual contribution is $6,000, you would need to spend the next 10 years adding that money back into your account. You couldn’t simply contribute $60,000 in a future tax year.
Bottom line, yes, you can use Roth IRA contributions as a college-savings option. But, withdrawing these funds should only be an emergency option. You simply forsake too much in potential retirement earnings when you withdraw these funds early.
Final Thoughts on College-Savings Options for Military Families
Without a doubt, the Post-9/11 GI Bill is the best college-savings option for military families, especially when paired with the Yellow Ribbon. But, for families with greater college tuition needs, other options exist.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
