Back to School: Advanced Placement
by Jill Schlesinger
September 13, 2005 - As we kick off another school year, many parents and grandparents must face the reality of rising tuition bills. Add to that, the fact that public universities’ are in a struggle to squeeze money out of state budgets that are under enormous pressure and you have one of the most difficult times for education funding in recent memory. If you think that you are unlikely to receive financial aid from colleges or the government – you are probably right. It has been become increasingly difficult to qualify for financial aid. That means it is even more important to save for education costs.
While the news is not great, doing nothing is certainly NOT the answer. You may not be able to completely foot the bill for school, but any amount saved might relieve your child from onerous school loans in the future. Education comes at a high price, but remember that time is on your side. Here are the three basic steps you need to take to start the process.
Step One: How Much Is This Going To Cost Me?
The first place to start is to figure out how much you need to save to get junior on his way. Here are the scary numbers: tuition, room and board for a four-year degree now costs an average of nearly $30,000 to $150,000 -- per child. To meet an obligation of that size, you need to start saving the day your child is born! The good news is that you can shop for education like you shop for a car—check out lots of options and weigh the costs versus the end products. Does Missy, a self-proclaimed "non-student" need to attend a school that costs $40,000 per year when she would be just as happy at an institution that costs $10,000 per year?
The good news is that over 70 percent of college students attend four-year colleges where tuition is less than $8,000, according to the College Board. The average cost (tuition and fees) of a four-year public college or university is over $3,500. The average cost (tuition and fees) of a four-year private college or university is over $16,000. Yes, there are plenty of schools that cost $40,000 per year, but as a client recently asked us, "Is the beer that much better in the Ivy League than anywhere else?"
Kidding aside, to get a better idea of the total nut, you need to think about which school your child might attend. If your child is in the ninth grade or higher, select eight schools she or he may realistically attend and ask the office of admissions for the current cost. For younger children, you can get information on dozens of colleges on the Web.
Step Two: How Am I Going To Save?
Once you have explored the cost of education, the next step is to create an investment plan for funding college. Parents continue to be flummoxed be the various education savings vehicles available, but the most important thing to remember is to do something.
Each situation is unique, but family expectations and income levels ultimately determine a family’s ability and willingness to save. Here is a summary of the pros and cons of possible education funding options.
Custodial Accounts: The benefit of these accounts is their flexibility. There are no limits on how much can be invested into the account and no early withdrawal penalties. However, there are also no tax breaks, and a custodial account could affect a family’s eligibility for financial aid. Also, this account will be completely owned by the child at the age of majority meaning that it does not necessarily have to be used for education.
State 529 Plans: These accounts are available in every state and are typically open to residents and non-residents alike. The major benefit is that 529 plans are tax-advantaged and allow you to save a sizeable amount of money for education expenses (over $200,000 per child in most cases). If the money is used for qualified education expenses, it can be withdrawn tax free, otherwise income taxes and a 10% penalty are assessed on withdrawals. The investment options may be more limited than those available with custodial accounts, and are made to be more conservative as the child gets older. 529 Plans offer flexibility in that if your child decides to forgo college to go surfing, the beneficiary of the account can easily be changed or the parents may use the funds to finance their own education costs. Also many states offer a state tax deduction for contributions made into the plans.
Coverdell Savings Accounts: These are essentially IRA’s for education. The good news is the amount that can be contributed annually has increased in recent years, but is still limited to $2,000 per year. Contributions are not tax deductible, but withdrawals will be tax exempt if used for qualified education expenses (otherwise there will taxes due and the 10% penalty assessed). This account becomes the property of the child and must be distributed by age 30. Coverdell eligibility is phased out for single tax filers with AGI of $95,000-$110,000 and joint tax filers with AGI of $190,000-$220,000.
Traditional Savings accounts and CDs: Although these options may feel safe right now, it is unlikely that the growth of these accounts will keep pace with the amount required for a child’s education many years in the future.
So what’s the best way to save? As typically is the answer, that depends…on your own level of confidence that the money will eventually be used for "qualified" educational expenses, how much time you have to save and if you are more comfortable with self- directed (straight mutual fund investing) or professionally managed accounts (529 plans). Of course the most important point is to get started with something.
Step Three: What Should I do as Time Passes?
Just like any investment, as you get closer to needing the money, you must adjust your portfolio to ensure that the money will be there when you need it.
The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors . For more financial information visit www.strategicpoint.com.
