Early planning is key in preparing for your child’s higher education. Did you know that your little one may not even be out of diapers before you should begin tucking away money into his or her college fund? The cost of a college education is pricey ... and steadily rising. Yet it remains one of the single most important factors that determines one’s financial success. According to the American Youth Policy Forum, individuals with a bachelor’s degree earn an average of $16,000 a year more than those with a high school diploma only, and the more education one has, the higher one’s income level tends to rise.
In an earlier column, I discussed how to realize your financial dreams for your children. Making sure they get the best education possible is an important part of the strategy. As many of you are no doubt still paying off your college loans, you know this comes with a high price tag attached.
To give you an idea of just how much a college education is going for these days, here are current estimations by the College Board. For 2004 to 2005, yearly tuition and related costs at private colleges climbed 6 percent over the previous school year, reaching more than $27,500. And while state colleges offer a less expensive alternative, tuition continues to rise at these institutions as well.
To be fully prepared, you must be disciplined about saving, and make sure you select an appropriate investment vehicle! Basically, you have three different options from which to choose: Section 529 College Savings Plans, Coverdell Savings Accounts, and the elders of the college savings plan family - Uniform Gift to Minors Accounts (UGMA)/Uniform Transfers to Minors Accounts (UTMA). Following is a brief introduction to each:
• If you have so much as scanned any kind of personal finance pages in recent years, then you’ve probably heard of 529 College Savings Plans. While there are many that fall under the 529 title, all offer individuals the opportunity to save and invest $110,000 in tax-deferred savings to fund future college and graduate school expenses of a child or other beneficiary. Monies can be withdrawn tax-free, as long as certain requirements are met. And unlike UGMA and UTMA accounts, you retain control of the money instead of it being turned over to your child when he or she turns 18. With 529 Plans, if your child decides not to go to college, you may name another beneficiary. However, if the money is returned to you, a 10 percent tax penalty will be due on any earnings.
• Coverdell Savings Accounts allow a maximum contribution of $2,000 per year per child. Savings are withdrawn tax-free. Be aware, though, that if your child decides not to go to college, he or she - not you - receives the money, and a tax penalty may apply.
• UGMA and UTMA Accounts allow you to contribute as much as you like, but if you exceed $11,000 a year, certain federal taxes may apply. And the money is turned over to your child once he or she reaches 18 or 21, whichever age you designate when the account is established.
Your financial planner can help you choose which investment vehicle best suits your situation. He or she can also help you determine how much you should invest each month to place you in a comfortable position by the time your son or daughter graduates from high school.
Imagine the financial advantage you will give your children if they can graduate debt-free! Well, with a little planning and discipline, it can be a reality.