Consider college early in child's life.
A newborn child brings many joys, but the parents also face new responsibilities. Many parents look at how they paid for their education, and then they see the viability of those options today.
The kids can pay for it: This may have worked in the days when many could earn their tuition money with part-time jobs.
Pay as you go: This may have worked for more people in the days when a few weeks' income could cover all of junior's tuition for the year, but now it takes months of income for many households to cover annual college costs.
Grandparents: This may have worked in the days when people weren't so concerned about outliving their retirement savings.
Win a scholarship or grant: Can you count on this?
Learn now - pay later (borrow): This may work as a gap-filler, but how much debt can the parents or children take on?
Save now - learn later: A systematic program of investing for the future doesn't sound glamorous, but it works.
Here is a deeper look at saving for college:
It's hard to argue with the value of a college degree. The amount of education you complete often directly affects your future earnings. According to the College Board, the lifetime gap in earnings potential between a high school diploma and a bachelor's degree is more than $1 million.
For many years, the college costs have risen at rates faster than inflation. According to The Federal Budget, for every $1,000 spent on education, only about $400 comes from loans, grants and other sources. The other $600 comes out of family funds. These can become big numbers when considering that today's students can easily exceed $50,000 for a four-year degree in a public college and $100,000 in a private one. Who knows how much these numbers will expand over the next few years?
Fortunately, parents have many choices when it comes to saving for college. Examples include:
Section 529 plans
Coverdell Education Savings Accounts (formerly Education IRAs)
Gifting to minors (UTMA/UGMA)
Investments owned in the parent's name
Cash value life insurance
Withdrawals from an IRA
Loans from a 401(k)
EE Savings Bonds
College Savings Accelerator programs (such as Baby Mint, U Promise, etc.): This supplemental strategy allows your family members and friends to add to a college fund using other people's money.
Keep in mind that parents and grandparents should be aware of the advantages and drawbacks of each option. For example, some choices provide permanent tax shelters, but others fail to shelter withdrawals after 2010. Consumers should stay updated on recent tax laws and changes in financial aid treatment, as these factors can greatly favor one vehicle over another.
Before you can choose which investment vehicles are right for your situation, you may consider a number of factors. These include:
Amount already saved, time available and estimated future amount needed.
Treatment for income taxes, estate taxes and gift taxes.
Financial aid plus Hope Scholarship Credits and Lifetime Learning Credits.
Control over investment decisions and limits on contributions.
Penalties limiting flexibility - is the account for college costs only?
Other savings goals (retirement, preparation for the `what-ifs' of life) affected.
Because of the complexity involved, it is a good idea to ask the advice of a professional who will consider all your financial goals when helping you select a college savings program. Parents seeking professional advice should know that Certified Financial Planner certificants complete a rigorous program to meet the highest standards in ethics, education and experience, and pass a 10-hour comprehensive examination.
Alex VonderHaar is a district supervisor in the Eugene office of Waddell & Reed. He has taught classes to parents and has counseled clients on the smartest ways to save for college. Birth To Three is a nonprofit organization dedicated to strengthening families through parent support and education. For more information about Birth To Three, call 484-5316.
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|Publication:||The Register-Guard (Eugene, OR)|
|Date:||Mar 6, 2005|
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