|Saving For College
You want your kids to have a great education, right? Here's what you need to know.
By Paul Barr
|It's no secret that the cost of going to college has skyrocketed in recent years. But unless you've been paying close attention, you may not know that one year at a private university can cost as much as a brand new BMW 325.
The total annual cost of attending a private four year college hit almost $25,000 this past academic year, according to the College Board, a school association. Public schools are cheaper, but still run about $11,000 a year in total.
So even if your kids are still in diapers, you should start planning for that day when the first college tuition bill arrives. You'll be doing you and your children a huge favor. Anyone who's been saddled with student loans after college can attest to that.
Saving for your child's college education can be as simple or complicated as you want it to be. Formal and informal savings plans and strategies are offered by colleges and universities, financial services companies, and national and state governments.
But the most important thing to do is get started as early as possible. Time is in your favor, and delaying indefinitely the decision to invest while you choose between a state-sponsored 529 plan and an UGMA trust account is a bad idea.
"The sooner you get started the better," says Penny Marlin, a financial planner with Lubitz Financial Group, Miami. Getting money working for you as soon as possible will lessen the amount of money you need to save overall to achieve your goals, Marlin says.
But how much should you save? Depending on your situation-the type of college, the time available to save-as little as $25 a week may be enough to cover half the cost of your child's education. More likely, though, it will be more than that. To get a solid estimate, check out the Web site FinAid (www.finaid.org). Among the site's many useful features are a series of calculators that help you figure the numbers on paying for college.
To know how much to save, you'll need to plug in current amount saved, an estimate on how much return your savings will earn, and the amount of time until your child is ready to start school. It'll even account for the fact that school costs are rising about 6% a year.
Be sure to also try out the College Cost Projector and the Financial Aid Estimator tools. Both might open your eyes to the realities of funding a college education.
Once you've decided how much to save, you'll have to make a decision about where to save it. Choosing an investment vehicle can be daunting, because the choices are not easy to understand. Do you go with municipal bonds, 529 plans, education IRAs, or plain old savings? Don't sweat the decision too much. In the end, there's not a huge difference as long as your saving as much as you can, says Mark Kantrowitz, publisher of FinAid, a Web site devoted to helping students pay for college.
The simplest saving option is to invest regularly in a broad stock index fund. The costs involved with a stock index fund may be low enough to offset the tax benefits and paperwork hassles of dealing with other options, such as the increasingly popular 529 plan.
You should at least consider a 529 plan, though, because these plans have become more attractive under the new tax laws. Previously, 529 savings plan allowed your savings to accumulate free of taxes until its withdrawn. Now, withdrawals will be free of tax too.
Kantrowitz says 529 plans are great for investors looking for a structured way to give them a reason to save. But the costs can sometimes outweigh the tax benefits, he says. There are usually two sets of fees you pay, an administration fee as well as a management fee that is charged directly to your investment account-you never see it.
Moreover, state governments administer 529 plans, and each one choose a different fee structure and investment manager to handle the assets. If you choose to go with a 529 plan, don't automatically choose your own state's plan, assuming they have one. You can choose any state's version. Kantrowitz says the New York state plan appears to offer a favorable deal in terms of costs.
And if you're the type of person who spends a fair chunk of dough each month at the mall, check out a Web site that puts money into a 529 plan based on the dollars spent at affiliated companies, similar to the way Discover credit cards rebate cash based on spending. When you purchase products through the program at places such as Toys R Us, CVS Pharmacy, America Online, General Motors, and Borders, a varying fraction of the money goes directly into a 529 plan for your selected student. Read the fine print, because there are some extra costs involved for certain parts of the program, but the money can roll in nicely if you're a big spender.
Saving for College (www.savingforcollege.com) is an excellent place to learn about 529 plans, and knowing the ins and outs. For instance, 529 savings plan assets are considered to be in the parent's name, a good thing when it comes to financial aid.
A loophole in financial aid standards encourages assets to be kept out of the student's name, so your best bet in general is to keep assets in your name to maximize financial aid. That makes trust accounts under the Uniform Gift to Minors Act a less attractive choice from a financial aid perspective.
As far as Education IRAs go, they're not a popular option, in part because the $500 annual limit is so low. That limit will be hiked under the recent tax bill to $2,000 a year. Still, Education IRAs limit your ability to take advantage of Federal education tax credits that are much better deals if you qualify, Kantrowitz says.
Municipal bonds, as well as EE Savings Bonds offer tax incentives, but the returns can't compete long term with what stock market investing offers. You might want to put a portion of your college targeted funds there, but not all of it.
For more info, read the vast education offerings at FinAid. The College Board's site (www.collegeboard.com) also overflows with useful information on college finances.
Another great site for researching and learning about the process is Wired Scholar (www.wiredscholar.com). The free site includes tools such as a scholarship finder for linking you with the free ride of your child's dreams. FastWeb (www.fastweb.com), which owns FinAid, also connects scholarships with worthy recipients.
Be wary of any service that charges for scholarship matching, Kantrowitz says. "If you have to pay money to apply, it's almost always a scam," he says.
If you're really feeling motivated, consider joining College Parents of America (www.collegeparents.org), an association for people like you that also lobbies in Washington. Membership costs $25 a year for an individual.
Even if college is just a few years away, it's not too late to start saving for it. And if you've got ten years or more, get started now. The longer you delay, the more you'll have to pay once your son or daughter enters those Ivy-covered halls.
Paul Barr is Senior Editor of Online Investor magazine (www.onlineinvestor.com)
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