SAVING FOR COLLEGE

This day and age, we know it is important for our children to go to college, so why do we wait until their junior year of high school and wonder where we are going to get the money from to send them to school.  From day one you need to start saving, even if you don’t have the money, it’s your duty as a parent. Think of all the change you find in your pockets at the end of the day, or in the bottom of your purse. As soon as your baby is born, start setting aside money. Start a savings account for your child. Open a mutual fund, pick a conservative (maybe a C share) and watch the interest grow. Holidays, birthdays, maybe every payday invest 10 dollars in your child’s future. Even just save the interest from your accounts at the end of the year and invest that into the mutual fund. Or your tax returns, invest them, watch them grow and you will give your child such a head start. Even the cost for community colleges is going up. If you start now, it won’t be such an overwhelming thing when it is time for them to go.

Some financial terms you need to know:

Investment – the total of cash and asset invested in a business enterprise. Investment is the use of saving to produce future income.

Mutual fund – a financial organization that pools the money of its members to invest it in a variety of securities. The fund doesn’t have a fixed amount of capital stock but sells additional shares to investors as they demand.

Life insurance – a system in which a person pays a small sum of money on a regular basis to have a large sum paid to family upon death. You can cash it in after a certain amount of time.  It can just be in place of a savings account, that way you don’t have quick access to the money so you can’t pull it out when you see those shoes you need.

Property – the equity in a home can also be used. Equity is the amount that a property is worth beyond what is owed on it.

 

College is one of the biggest things you will ever have to save for. Here are 3 things you can do before your child’s fifth birthday.

First is to set a goal

Financial planners are always preaching the importance of setting a goal first. There are benefits to doing this: it will be easier to maintain the savings discipline if you know what you’re shooting for, and you’ll know early on if you and your partner have different ideas about paying for college. Here are some issues you should sort out:

-How much of the bill are we willing to pay? Should parent pay the entire college education or perhaps you feel your child will only truly value an education if they have to pay a chunk of it themselves.

-Will you pay for private school? Some parents pay college cost up to the level of tuition and room and board at the local State U. If your child has his heart set on a pricey private school, you might have him to make up the difference.

– Will you pay for graduate school? Medical or law school can double or triple college expenses.

Crunch The Numbers

Now that you agree on what you’re willing to pay for, you’ll need to figure out how much it will cost. Some evening fire up the computer and run the numbers. There are several college calculators that will guide you through the process. Try a few different scenarios: public school vs. private school, having more children (if it’s part of your plan) If you plan to fund four years at a public university, you’ll need to save about $200 a month– equivalent to a $2,000 IRA each year plus an extra $50 a month. If you plan to foot the whole bill at a private college (on average $21,000 a year today) you’ll need to put aside about $500 a month.

If those numbers seem out of reach, don’t give up. Delaying will only make it worse. Waiting just four years will increase your monthly savings amount by 50 percent, and if you don’t start until your child is in eighth grade, you’ll have to save three times as much.

On the other hand, there’s no rule that you have to save the entire amount before your child can set foot in a university. Most parents pay for college through a patchwork-quilt approach: some savings, some current income, student loans, a home equity line of credit and summer saving. Figure out a monthly amount you can work into your budget and move on to the next step.

Start Saving

The smart saver ruler is to accumulate money in the most efficient place and then pull it out in the most efficient way. Usually this means taking advantage of tax breaks that will help your money grow more quickly. Your 401(k) plan at work is a great place to save, but chances are you’ll need every penny of that for your own retirement. A terrific runner-up is the Roth IRA.

If you and your spouse make less than $150,000 and you file joint tax returns you can each fund a $2,000 Roth IRA each year. You don’t get a tax break when you invest, but you can pull out your $2,000 contribution whenever you wish, tax-free. If you use the earnings for college costs, you pay regular taxes with no penalty. If you are older than 59 ½ when your child is in college, you can pull out the earnings tax-free as well. Plus, Roth IRAs are not currently counted for figuring financial aid under the federal rules. If you save $4,000 a year and earn 9% per year, you’ll have $56,000 tax free in 14 years plus $48,000 in earnings (about $32,000 after taxes).

When you invest in a Roth IRA, you choose where your money goes. Shop for a growth oriented no-load stock mutual fund. The Vanguard Total Stock Market Index will spread your investment over the whole U.S. stock market. The minimum investment is $1,000 for an IRA. The T. Rowe Price family of mutual funds will let you get started in a Roth IRA for as little as $50 a month if you have the money taken out of your bank account. The Equity Index fund is a great choice.

 

There are also a few other alternatives:

State-Sponsored College Savings (529) Plans

-Advantages: Tax-deferred asset growth. Contributions allowed up to about $100,000 a year. Some states allow residents to deduct contributions from state taxes. When withdrawn to pay for higher education, gains are taxed at the lower child’s rate (some state levy no state taxes on gains).

-Disadvantage: plan administrators, not you, decide investment strategy. Investments may not be aggressive enough for risk-tolerant investors who think they can earn more than enough to balance the tax advantage.

Prepaid Tuition Plans

-Advantage: Pay current tuition rates for an education far in the future. No worry about investment returns.

-Disadvantages: Full tuition is only covered if your child decides to go to an in-state college. Prepaid plans replace financial aid, so they may not be a good deal for a child who will qualify for substantial aid. If your child decides on a private college– or none at all– the plan will pay according to how much your investment have earned

Grandparent “Plan”

This is not a tax-advantage college saving plan in the strict sense, but it can be a neat trick. Grandparents with money to spare can pay tuition bills directly to a college without incurring a gift tax. Funds owned by grandparents do not show up on the family financial aid application, so this is one legitimate way to “hide” assets.

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