What Does This Article Cover?
- What is the average cost of college tuition, fees, and room and board today?
- Why is it important to start saving for college as early as possible?
- What are the different ways to save for college?
|
 |
The cost of a college education can be high-sometimes very high. According to the College Board's Annual Tuition, Fees, Room and Board Study, the average total costs (tuition, fees, room and board) at four-year public colleges and universities for the 2003-04 academic year is $10,636. Average total costs for four-year private colleges are now $26,854.
When you consider that these annual figures must be multiplied by a factor of four to calculate the total cost of a four-year degree, and the fact that these costs are rising (according to National Center for Education, www.nces.ed.gov, between the 1991-92 and the 2001-02 academic years, prices at public and private colleges rose 21 percent and 26 percent respectively), it's no wonder that how to pay for college is among parents' top concerns today.
The $1 Million Difference
At the same time, a college degree is a superior investment of both time and money. College provides an educational challenge that sparks curiosity and a lifelong thirst for learning. And according to The College Board (2004), "people with a bachelor's degree earn over 60 percent more on average than those with only a high school diploma. Over a lifetime, the gap in earning potential between a high school diploma and a B.A. (or higher) is more than $1,000,000. What this boils down to is that whatever sacrifices you make for your college education in the short term are more than repaid in the long term." (www.collegeboard.com).
The Time to Start is Now
How and when families begin to save for college makes a substantial difference in the amount of money that will be available for-and the range of choices a student will have. Starting early gives the money set aside the greatest amount of time to potentially grow. Yet, according to the most recent statistics taken by the NCES in 1999, while parents of 93 percent of 6 to 12th-graders expected their children to continue their education after high school, only about half these parents had begun to prepare for this expense.
So if you haven't begun to save for college, no matter how old your future collegian, the time to start is now.
Building a College Savings Plan
Today there are more tax-advantaged ways to save for college than ever. Here are some suggestions for how to go about building a college savings plan.
Create a strategy that matches your needs. The best way to save for college depends on a variety of issues including how many years away college is, your income, your risk tolerance, how much you have available to set aside for college, your other savings and investment plans, and other factors. Work with a financial professional to build a savings and investment strategy that matches your needs and takes maximum advantage of tax-advantaged college savings vehicles.
Check periodically to be certain your plan continues to match your needs. Be aware of tax law changes that can affect your savings options. Check in periodically with your financial professional to be certain your college savings strategy continues to match your needs and goals.
Consider the role of permanent life insurance. Insurance benefits from a permanent life insurance policy can help pay for a child's education in the event of your death. In addition, the available cash value that may accumulate in a permanent life insurance policy may be accessed through policy loans to help pay for education expenses if it is determined that the full death benefits is no longer needed. Please keep in mind that loans against the cash value in your policy accrue interest at the current rate and decrease the death benefit and cash value by the amount of the outstanding loan and interest.
Be aware of grants and loans that may be available. The College Board's Annual Tuition, Fees, Room and Board Study reports that this year, a record $105 billion in financial aid is available to students and their families, an increase of 12 percent over last year. (Most financial aid comes from the Federal Department of Education (www.ed.gov) and is available as grants, work study programs, and loans. Contact your state department of education to find out about state aid programs.)
Know your savings options. In recent years, the tax law has made a variety of college savings options available to students and their families, including:
Section 529 Plans#
These are state-run educational savings plans that enable you to put money aside for education that grows on a tax-deferred basis as long as the plan satisfies the basic requirements. The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee a college funding goal will be met. A 529 plan is an investment program. The state selects the investments included in the program. Some states may let you choose from a list of investment options while others offer only an investment package. These plans are not only administered by individual states, but by corporations as well.
#Offered by properly licensed Registered Representatives.
You don't have to be a parent to open a 529 account. Anyone can put money into a 529 plan on behalf of a future student. An eligible account owner may include an individual, a trust or estate, a partnership or LLC, an association, a corporation, or a 501(c)(3) charitable organization. You can even open an account for yourself if you're considering college for yourself.
The money you put into a 529 account is not tax deductible, but as of 2002, all earnings in these plans are exempt from federal taxes if they're used to pay for qualified educational costs. Many states also offer similar tax advantages and some may let you deduct the contributions to the account as well if you invest in your home state's plan. Check with your tax advisor about annual contribution limits to a 529 plan.
Section 529 plans do however have a certain amount of complexity. Some states have a residency requirement as well as a rule about the amount of time money must remain in the plan before it can be withdrawn tax-free. You should check with each individual state for information. Plans can have enrollment and annual management expenses and fees. And, it's important to realize that 529 plans do include a measure of risk because the value of the account will depend on the performance of the investments included in the plan's portfolio.
Please contact your financial professional for more information on 529 plans and/or obtain the appropriate disclosure statements and the applicable prospectuses for the underlying investments of the 529 Plans we have available. Investors are asked to consider the investment objectives, risks, charges and expenses of a portfolio carefully before investing or sending money. The disclosure statements and prospectuses contain this and other information about the investment options and their underlying investments. Please read this material carefully before investing or sending money.
529 Plan Disclosure
State tax treatment varies.
For withdrawals not used for qualified higher education expenses, earnings are subject to income taxes at the distributor's rate plus a 10 percent federal tax penalty.
Please keep in mind there are fees, charges, and tax ramifications associated with a 529 plan and the underlying investment options are subject to market risk and will fluctuate in value.
Coverdell Education Savings Accounts (formerly called Education IRAs)
These are savings accounts parents can use to save for a child's education. In 2002, the per child annual contribution limit rose to $2,000 per child. There are eligibility requirements and income limits for parents who would like to contribute to these accounts, and contributions must stop when the child reaches 18. The contribution itself is non-deductible, but the earnings are federally tax free if the money is used to pay for qualified education expenses. State tax treatment varies. For withdrawals not used for qualified education expenses, a 10% federal tax penalty will apply.
Note that these savings accounts do not limit the amount you can contribute to other IRAs you may have, and you can contribute to a Coverdell Education Savings Account (C-ESA) and a Section 529 plan in the same year. In contrast to a 529 plan, however, you can use the money in a C-ESA to pay for private and religious elementary and secondary schools.
As with any IRA, within an Education Savings Account, you can self-direct the investments.
Prepaid Tuition Plans
The notion of Prepaid Tuition plans is that parents' investment in the plan buys a certain number of tuition credits at a college or university at today's costs. Parents are in effect locking in the cost of college and insulating themselves from rising college costs by investing in a prepaid tuition plan. Parents-or really anyone with an interest in the child's educational future, including grandparents, aunts, uncles, etc.-select the type of college (two- or four-year) and the number of semesters or years their budget permits them to buy. Of course, the size of the payment will depend on the number of years until the child will attend college.
The money in a Prepaid Tuition plan grows tax deferred and withdrawals are tax-free if they're used for qualified education expenses. For withdrawals not used for qualified education expenses, a 10% federal tax penalty will apply. These plans include restrictions, for example, the child must attend the school in the state which sponsor the plan and the money must be used to pay for qualified higher education expenses.
Note that the December 2003 issue of Kiplinger's Personal Finance (www.kiplinger.com) included and article entitled "Princeton Tomorrow At Today's Tuition" which described new independent 529 Plans that enable parents to lock-in tuition costs at any of 223 participating private colleges at today's prices.
Custodial Accounts
Custodial accounts were enabled by the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act, both of which enable tax-free money or asset transfers to children within certain limits. Individuals can give up to $11,000 ($22,000 if married) each year to a minor. Assets are included in the donor's estate, when the donor is also the custodian. Parents, grandparents, relatives, and friends can open these accounts in the child's name. Custodial accounts are funded with gifts of money, within allowable limits. The money may then be used to buy stocks, bonds, annuities, or other investments. These accounts are governed under the laws of the state in which the account is established. Check with your tax advisor about the taxation of these accounts.
Roth IRA
These popular savings vehicles, designed for retirement savings, may also be used to save for college expenses. Contributions to a Roth can be withdrawn at any time without tax or penalty. You can also withdraw earnings to pay for college expenses without penalties, though you will still have to pay regular income tax on this money unless you're over 59½.
00287568
Be the first to Comment
