How to Prepare for the $100,000 Price Tag
If you're the parent of a newborn or young child, you've probably heard the depressing estimate of the cost of a college education when your child is ready to enter college 18 years from now. The cost of four years in a public college is expected to cost in excess of $100,000; a private school, over $200,000. What's a parent to do?
Start Now!
The sooner you start investing for your child's education, the better. As with any other investment goal, time is your best friend.
Have a Plan
The first step in making a plan is to estimate what the total cost of your child's education is likely to be. The average in-state tuition for a public school now averages over $10,000 per year. At five percent inflation per year, the estimated cost per year 18 years from now would be around $24,000 (10 years from now the cost would be approximately $16,000).
Private schools can be two to three times as much.
Don't let these numbers scare you into inaction. Some of your child's education can be paid for through scholarships, financial aid, and student loans. It's possible to save the rest if you start early, contribute regularly, and invest wisely.
The only thing worse than not saving at all is putting your money in a passbook savings or money market account. In order to amass enough money to finance four years of college, you need to not only start early, but invest aggressively. Stock funds historically have almost always exceeded other investments over periods of ten years or more. Look for no-load (no fee to purchase or sell) mutual funds with low expenses. Refer to Money Magazine's semi-annual mutual fund listing that includes information on expenses and performance for thousands of funds.
Don't just park your money in a fund or two and leave it. Review the performance of the funds at least annually, and make adjustments as necessary for under-performing funds. When your child is five years from starting college, begin to shift your money into growth and income stock funds and bond funds, reducing your exposure to market ups and downs while still aiming for high returns.
Two to four years before your child is due to start college, cash in enough stocks and bonds to pay for the first year, and put it somewhere safe and accessible, like a money market fund. If you wait until just before you need the money, you may be forced to take it out at a time when market performance is down, thus losing some of your earnings.
When trying to come up with the money for your child's college education, a combination of financing methods will probably work best. Be sure to take advantage of any tax-deductible methods that you're eligible for. Some of the available financing methods include:
If you'll be 59 1/2 when your child is in college, a Roth IRA may be an attractive investment vehicle, because withdrawals will be tax free (assuming you've had the account for at least five years).
Even if you'll be younger than 59 1/2 when your child is in college, there are benefits to Roth IRAs. You can still withdraw your contributions without paying taxes or penalties, and earnings can be used to pay for college expenses without a penalty, although you will have to pay taxes.
The proceeds from Education IRAs aren't taxed, but your contributions are limited. While this might help pay for some college expenses if you start when your child is very young, it will never cover the cost of a four-year degree.
The Hope Scholarship Credit allows a deduction of 100 percent of the first $1,000 of qualified tuition and fees and 50 percent of the next $1,000, up to a maximum of $1,500 per year. The credit is phased out at certain income levels. Like the Education IRA, this credit by itself will not go very far towards financing a college education.
State college savings (529) plans, on the other hand, give you the opportunity to earn stock-market returns on college savings you don't need for several years. Contributions grow tax-deferred until the money is used to pay for college, then earnings are taxed at the student's tax rate, another attractive benefit. If the money isn't used for college, however, there can be a penalty of 10% to 15% of your accumulated earnings or 1% of the account balance.
Pre-paid tuition plans, another type of 529 plan, are attractive when tuition rates are rising around 10% a year, but they limit your growth to the rate of public-college tuition increases in your state, so when tuition increases level off at 4 to 5%, these plans are no longer very attractive vehicles for financing a college education.
Life insurance policies are sometimes used to finance a college education, but some experts say this is not a good method for most people. Although variable life insurance policies include tax-deferred investment options, there are significant costs for the life insurance, sales commissions, and management fees, reducing your earnings. This option may only be viable for those in the 28% or higher tax bracket who will probably not qualify for financial aid.
If you start early, know your alternatives, develop a plan, and invest wisely and regularly, it IS possible to pay for your child's college education.
By About Financial Planning
http://financialplan.about.com/cs/college/a/FinanceCollege.htm
