With college tuition prices still on the rise and the economy in shambles, how does an average family meet college costs? The answer is they save early and often! Remember when a college education was reasonably priced? Those days are gone, and that’s why college planning is so important. Between 2001 and 2006, the average tuition and fees at four-year public colleges and universities increased by 35%. The average tuition for private colleges increased 32% between 1996 and 2006 (according to the College Board).
How soon is too soon?
It is never too soon to begin saving for your child’s education. Many parents start as soon as a child is born. Some parents begin planning before children arrive. If you’re planning on having a family “someday”, start planning now. If you have a child on the way, start now. If you have an infant, toddler, grade-schooler or teenager, start now. Notice a theme here?
How late is too late?
If your child is already in high school, you may feel it’s too late to start saving for college. But think again. ANY pre-planning and saving you can do is better than nothing. If you are in a time crunch to save, start thinking of ways to reduce your monthly expenses and increase your cash flow NOW. Then look at some ways to invest what you’ve saved. There are many options beyond a traditional savings account, such as CDs or money market accounts. Do some research, or better yet, enlist the assistance of a financial professional.
What about your retirement?
While you may feel that putting off your retirement for a few years is an acceptable trade-off, you should not have to sacrifice your retirement savings to put your children through college. Remember that student loans are available. While you may not want your child to assume such a financial burden, you could always help out with repaying the loan later. Also, by having your child be responsible for at least a portion of their college tuition or expenses, they may experience a greater understanding of and appreciation for the value of their education.
What are my college saving options?
Here are a few college savings vehicles to consider:
1. 529 plans:
These state-sponsored college savings plans let you put away up to $12,000 per year for your child’s college costs without having to file an IRS gift tax return. (The plans in some states have no contribution limits – and you don’t have to live in those states to invest in those plans.) You can even “frontload” a 529 plan and put in $60,000 to start ($120,000 for a married couple) without triggering the gift tax. The money you invest grows tax-deferred, and withdrawals are tax-free as long as the money is used for college expenses. If your child doesn’t want to go to college, you can change the beneficiary if the account is in your name.
2. Coverdell ESAs.
Single filers with modified adjusted gross income (MAGI) of less than $95,000 and joint filers with MAGI of less than $190,000 can pour up to $2,000 annually into these tax-advantaged accounts. The money saved and invested can be used for college or K-12 education expenses. Contributions aren’t tax-deductible, but the account enjoys tax-deferred growth and withdrawals are usually tax-free. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn when the beneficiary turns 30. After 2010, there is a chance that the annual contribution limit on a Coverdell ESA may drop to $500.
3. UGMAs & UTMAs.
These all-purpose savings and investment accounts are often used to save for college. When you put money in the account, you are making an irrevocable gift to your child. You manage the account assets. When your child turns 18 – or 21 in some states – he or she can use the money to pay for college. There are two caveats: 1) your child can actually use the money for anything, 2) the money withdrawn from the account is considered income and might lessen your child’s chances to qualify for financial aid.
4. Cash value life insurance.
If you have a whole or variable life insurance policy, you can borrow from, withdraw against, or even cash out the policy to meet college costs. You can make tax-free withdrawals from such a policy as long as you don’t exceed the cost or “basis”, or the total amount of premiums paid.
5. Mutual funds.
Lastly, you can put a professional money manager in charge of your college savings and invest for college with a mutual fund. Yes, many of them took huge hits in 2008, but for the long term, they remain a strong and viable option.
Other alternatives to consider …
If money is tight, would your child be willing to complete their first two years at a local community college, then move on to their preferred college or university later? The tuition likely to be much less at a state community college, and you could realize additional savings if your child attends school while living at home. If your child does not wish to start college locally, it may be worthwhile to look into the myriad of scholarships, work study programs and off-campus jobs that may be available. The guidance office at most schools will have job information available if you inquire.
The simple fact is that the sooner you plan, the better. If you haven’t begun planning, start now – there is no better time to get the proverbial ball rolling. You may be surprised how a little planning now can make a big difference in the years to come. Talk to a financial advisor today about these savings methods. It will be great for you and your child if he or she graduates from college debt-free.