Best College-Savings Options for Military Families

I am an active-duty Air Force member with two sons. What are the best college-savings options for military families like mine?

That’s a great question, and one that my family has dealt with ourselves. My husband, an Army surgeon, has transferred his GI Bill benefits to my 9-year-old son, which will cover some of the costs when he goes to college. We’re also supplementing that money by saving in a state-sponsored 529 college-saving plan. Here’s what you can do to make the most of both of these opportunities.

First, find out if you can transfer your GI Bill benefits to your children. The Post 9/11 GI Bill covers the full cost of in-state tuition and fees at public colleges for up to 36 months (four academic years), or up to $18,077 per year for private colleges and foreign schools, plus providing a housing stipend and money for books and tutoring. The money may be used for undergraduate or graduate programs, or for certain programs at vocational and trade schools. And one of the best features of the Post 9/11 GI Bill is that longtime service members may transfer their benefits to a spouse or children. To qualify, you must be on active duty or selected reserve, have served at least six years in the armed forces, and agree to serve four more years (the extra service requirement is shorter for service members eligible for military retirement between August 1, 2009, and August 1, 2013). For more details about the benefits, see the GI Bill fact sheet.

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Note that you can transfer your benefits in one-month increments, up to the 36-month ceiling.Your spouse may use the transferred benefits right away; your children must wait until you’ve served at least the full ten years. Service members and veterans (and their spouses) must use the benefits within 15 years of leaving the military. Children do not have the 15-year time limit, but must use the benefits by age 26.

If you’d like to transfer your benefits to your children, apply for the transfer as soon as you’re eligible, even if your kids won’t be attending college for many years. The clock starts ticking on the additional four years of service on the date the transfer is approved. So, for example, even if you’ve already served 15 years, you’ll need to serve four more years. You can’t add new beneficiaries after you leave the military, so it’s a good idea to sign up both of your kids (and maybe even your spouse) for at least one month of benefits as a placeholder; you may change the allocation or remove beneficiaries until the time the benefits are used. My husband transferred his GI Bill benefits when my son was 8 years old, so the service-requirement clock started ticking right away. He also transferred one month’s worth of benefits to me, just in case I wanted to go back to grad school in the future.

For more information about transferring benefits, see the Department of Defense’s GI Bill transfer page and the Department of Veterans Affairs GI Bill page.

If GI Bill benefits only cover part of the bill for an out-of-state or private college, you (or your spouse or children) may qualify for extra help from the Yellow Ribbon program. More than 1,000 colleges currently provide scholarships each year for a certain number of students who are also using the GI Bill, and the Department of Veterans Affairs matches the school’s contribution. See the VA’s Yellow Ribbon Program page for more information.

Still, Yellow Ribbon benefits are not guaranteed and could change a lot by the time your children go to college. Also, your GI Bill benefits are unlikely to cover the entire cost of college for both your children, especially if they end up going to a private college or an out-of-state public school. Our family decided that it was important to supplement my husband’s GI Bill benefits by saving money in a 529 plan, which can be withdrawn tax-free for college expenses.

Although you may invest in any state’s plan, it’s usually best to invest in your own state’s plan if it offers a state income-tax deduction. But for military families, the strategy can be slightly different. Many members of the military maintain their legal residence in another state even after they move. Look first at the state where you pay state income taxes -- not necessarily where you live now -- to see if you can get an income-tax break there for your contributions. (See www.savingforcollege.com for more information about each state’s tax rules.)

If the state where you pay taxes doesn’t offer a tax break (or if your legal residence is in an income-tax-free state), consider some of our favorite plans. See Smart Ways to Save for College for some of our picks.

For more information about special benefits, laws and savings opportunities for service members and their families, see our Personal Finance for Military Families special report.