Saving for College
Empty Your Nest, Not Your Savings
Do you dream of your child becoming a doctor? Or the next great lawyer? Of course, a well-paying, rewarding job is all you really want for your kids’ future. The key for either scenario is a college education. But can you afford it? Helping to secure your children’s future shouldn’t come at the risk of your own.
You’ll find a way
You know the importance of a college education. You know that without it, your children may be at a great disadvantage later in life. That’s why, despite the skyrocketing costs, you also know that telling your kids, "Sorry, we can’t afford it," isn’t an option. You’ll find a way, right? You will as long as you understand the right ways – and the wrong ways – to fund a college education.
So what will college cost when the kids are ready to leave the nest? Consider that the average annual price of a four-year private college today is $34,132 (includes tuition, fees, room and board); while the average annual price of a four-year public college, for in-state students, is $14,333.1
Think you can handle that? Now, multiply that by four years – and by each child. And don’t forget to account for tuition increases, which have averaged about 6 percent annually, outpacing the inflation rate the last few years. At that rate, in 2022, about the time a five-year old child today will be entering college, the total four-year cost will be $300,450 for a private college and $126,167 for a public college!2
To accumulate enough money to foot such a bill, you need to begin setting aside money immediately – ideally right after your child is born. As the following chart shows, to net even $50,000 towards college costs, you should save $100 a month beginning at birth. And the longer you wait, the more you’ll have to put away each month to reach that same $50,000.
If saving begins when the child is:
Amount you need to save monthly to have $50,000 at age 18
Assumes 6% compound annual interest. Hypothetical example and not intended to represent the performance any specific product.
1 National Association of College and University Business Officers; "College Price Increases Keep Pace With Inflation." November, 2008
2 FinAid, College Cost Projector, www.finaid.org/calculators/costprojector.phtml
Save and study plans
The government has established a number of programs and tax laws to make saving for college easier. A few popular options include:
- 529 Plans – These state-sponsored investment plans provide taxdeferred earnings and income tax-free withdrawals (for qualified expenses). In addition to tuition, room and board, the money can be used for other expenses, such as books and supplies. Some state plans even allow you to deduct contributions from state income taxes. If the account’s beneficiary (the child) decides not to attend college, the money can be put towards another family member’s education; otherwise, it’s taxed at your normal rate. Remember, withdrawals for non-qualified educational expenses are subject to a 10% federal tax penalty and are taxed as ordinary income.
Before investing in a Section 529 plan, you should consider whether the state you or your designated beneficiary reside in or have taxable income in has a Section 529 plan that offers favorable state income tax or other benefits that are only available if you invest in that state’s Section 529 plan.
- Coverdell Education Savings Account – This account provides tax-deferred earnings and income tax-free withdrawals (for qualified expenses); but participants must meet specific income requirements and you can only contribute up to $2,000 annually. If your income exceeds the maximum, however, grandparents and other relatives can set up a Coverdell in your child’s name. The fund is transferable to another child if a first child does not go to college; however, taxes and penalties apply if it’s not used for college.
- Uniform Gifts (or Transfers) to Minors Act – UGMAs/UTMAs allow you to transfer up to $11,000 a year to an account held in a child’s name; although you (or the donor) are the custodian of the account. The money is taxed at the child’s rate and is no longer part of the adult’s taxable holding; so, technically, it can reduce your income tax bill. Realistically, though, the gift must be sizeable for any real tax benefit. Also, once given, it can’t be taken back; and the child can use the money for anything – not necessarily college – once he or she reaches adulthood.
- Tax Credits – Families that qualify can earn income tax deductions (tax credits) for college costs. The Hope Scholarship Credit provides up to $1,500 per year, per student during the first two years of college; while the Lifetime Learning Tax Credit provides up to $2,000 per family for third- and fourthyear and graduate students. To qualify, families must meet certain income requirements: $51,000 for single head-of-households and under $103,000 for joint returns.
An age-old strategy
Whatever investment vehicle you choose to save for your child’s education, your investment strategy should be consistent with the child’s age and number of years until college: more aggressive during a child’s early years, when you have more time for money to compound and grow; and more conservative as the child approaches college age. Simple guidelines include:
- Pre-school years – Consider investments that perform best over time, such as stocks or stock funds. While riskier than bonds and money markets, over time, stocks can potentially produce higher returns.
- Grade-school years – Consider shifting to a more balanced approach to risk and return, with an investment mix of stocks and some conservative bonds.
- High-school years – Consider shifting to shorter-term, more conservative investments, such as CDs, money markets or bonds. Going to the source Most schools offer some type of financial support for students who qualify, such as:
- Financial aid – Factors considered include parents’ annual income, assets, number of dependents, other family members in college and unusual circumstances.
- Loans – Students must repay the loan through a payment schedule for many years after graduation (which could become a financial burden and affect credit rating).
- Athletic and academic scholarships – Awarded to students based on a variety of achievements and qualifications.
Other sources of aid from schools include work-study programs, merit awards for academic achievement, activities awards for involvement in various student activities and assistance for disabled students. Contact each school for its specific programs and policies.
The wrong way to pay
While they may be tempting, you should avoid the following options to pay for college:
- Retirement plans – Some tax-deferred savings plans, like IRAs, allow you to access money for educational expenses without penalty; however, income limits and withdrawal restrictions often apply, and you’ll have to pay income tax on the money. And, if you deplete your retirement savings, you might have to work longer to rebuild your nest egg, or live on less in retirement.
- Home equity loan – While the rates on home equity loans are low and interest is tax deductible, you could find yourself paying off your house into your 70s, instead of enjoying your retirement. And since the loan is secured by your house, you risk losing your home if you can’t pay it back.
- Money manipulation – Attempting to move your money around so you appear to qualify on a financial aid application is not a sound strategy. In addition to your income, assets that apply to your net worth include everything from property owned to money held or received in nearly every way (such as Social Security, pension and student grants).
You should consider the investment objectives, risks, charges and expenses of the variable product and its underlying fund options; or mutual funds offered through a retirement plan, carefully before investing. The prospectuses/prospectus summaries/information booklets contain this and other information, which can be obtained by contacting your local representative. Please read the information carefully before investing.
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