Saving for College
Ten or 20 years ago, a new parent might joke about paying for a child's college education, but it wasn't an immediate concern. Back then, most parents would worry about college when the time came and take out a loan if necessary. Nowadays, the ink on the birth announcement is scarcely dry before the proud mom and dad are opening a college savings account. What's the rush? Don't we have at least 18 years to save? Do we really need to start so early?
"Absolutely!" says Carlos Duran, an independent agent for State Farm Insurance in Hightstown, N.J., and the father of three young children. "With college costs the way they are, parents have no choice but to start saving early, especially if they won't qualify for financial aid."
According to Duran, in 18 years a parent can expect to pay an average of $30,000 per year per child for college education, more if the child will be attending an Ivy League school. Rather than create a financial burden for themselves years from now, more and more parents are choosing to open a college savings plan.
"If parents open a plan such as a 529, it will be less of a sacrifice 13 or 15 years from now, and they won't have to take out a loan or refinance the house to pay for a college education," says Duran.
"The 529 plan is the newest way to save for post high school educations," says Nancy Jassak, a financial services specialist for Independent Capital Management, Inc., in Camarillo, Calif. "It includes any accredited college in the U.S." If used specifically for college and its subsequent expenses, the 529 grows federally tax deferred and comes out tax-free (see note below). If your child decides college isn't for him, the account can be rolled over and used to fund another student's education. There's no age limit either. The money can be used for a much older student if one is so inclined.
One of the reasons Duran prefers a 529 savings plan is because anyone can contribute. His recommendation to grandparents, aunts and uncles is to take any money they might otherwise use to buy gifts and savings bonds for special occasions, such as christenings and graduations, and contribute to a 529 plan instead.
Diane Musto of Hillsborough, N.J., began saving when her children were first born. She and her husband, Joe, a financial analyst, already have 529 college savings plans in place for their children, Andrew, 2, and Theresa, 6 months. "I think it's irresponsible not to save for your child's education provided you have the financial means to do so," Musto says. "You always want your children to have more opportunities than you had. Given that the costs of college are rising at incredible rates, it's a pretty safe bet your children will not have the money to pay for it themselves."
Musto isn't alone in her thinking either. When faced with the staggering statistics, parents all over the country have opened accounts on behalf of their children, hoping to give them a chance at affordable higher education.
In addition to the 529, there are several other options for parents looking to invest in a college savings plan:
- The Coverdell – A Coverdell account allows up to $2,000 per year deposited into each beneficiary's account. The Coverdell allows for tax-deferred savings, and if the money is used exclusively for school, it remains tax-free. The Coverdell can be used by beneficiaries 18 and younger. Only those with special needs qualify for a Coverdell if they're over 18.
- Roth IRA – Tax- and penalty-free withdrawals can be made from a Roth IRA if the money is being used to fund a college education.
- UGMAs and UTMAs – Custodial accounts are also a good way to save. An account is saved in the child's name with a parent or guardian named as custodian of that account. The funds don't necessarily have to be used for college, however, and the money can be collected as soon as the child reaches legal age. Up to $11,000 can be contributed annually; after that a gift tax comes into play. It's important to start saving early because there are tax benefits for children under the age of 14.
Dan Verbus of Abingdon, Md., likes the flexibility of the custodial account. "We put some money from every paycheck in a jar in the house and every few months take it to the bank," he says. "We have separate accounts set up for each of our kids." It may not be as much as those who are contributing thousands of dollars to other college savings plans, but it's something.
What about the parents who haven't opened a college savings plan or who don't have thousands of dollars to invest in one? Will their children be able to attend college? There are still options:
- Parents can take out a home equity or other loan to help with tuition and other expenditures.
- Teenagers can be encouraged to take summer or weekend jobs to help pitch in.
- Children should be taught good study habits early so they can apply for scholarships and grants to help defray the costs.
- Consider sending the child to a community or technical college, at least for the first two years. These schools are more affordable.
If you're interested in opening a college savings plan for your child, your best bet is to seek the advice of a financial planner or advisor. Your advisor will help you find the best plan to suit your financial situation. Make sure you learn all the benefits and risks of each plan before signing up for anything. When it comes to your child's education, you can't start saving too early.
Note: Tax information is based on the Economic Growth and Tax Relief Act of 2001and is effective through December 31, 2010, unless extended. This information is general, not specific to any one investor, and you should always consult a tax advisor before making any investment.