Sunday, March 25, 2007

Saving for College, 529 plans, Coverdell Accounts

Saving for College

Great article over at Yahoo Finance on Saving for College, here is what they said along with my comments.

Both students and parents can make the most out of the educational dollars they set aside by exploring the many savings tools available. Since the cost of higher education is rising faster than the rate of inflation, traditional saving vehicles like CDs and savings bonds just can't foot the bill alone. Fortunately, options such as Coverdell Education Savings Accounts (CESA) and 529 Plans make planning, saving and paying for college easier.

For Students: It is never too early, or too late, to begin saving for college. If you earn your own money from a part-time job, try to put some away before you decide how to spend it. Start out small with maybe 5%, and gradually increase the amount as your earnings allow. As your piggy bank grows, put your savings to work for you. Open a bank account that lets your hard-earned money grow but still offers easy access. Most banking institutions offer traditional savings accounts and certificates of deposit that pay interest. It is interesting to watch how different families approach the issue of paying for college for their child. Some families feel as parents they need to fund the entire costs and they stress about this because they don't know how to do this. Others think it is ok for the student to take on studet loans and pay for the education themselves over time. I think it needs to be a balanced approach. My personal experience was I paid for college myself, when I left high school I had saved enough money for only 1 year at the university however, I went to a community college for 2 years which effectively allows you to cut your tuition costs in half. Every summer I worked a full time job and cut lawns on the weekend and I was able to earn enough money to pay for my room and board and even a $1000 per year in spending money. I drove and $800 car, went to the bar on Thursday nights and did three spring break trips. I finally ran out of money in my last year of college and my parents paid for $800 of my tuition. It can be done and I did it without any loans or finanicial aid. On the financial aid part I was stupid because there were several merit scholarships that I could have received if I would have met with a counselor and explored the options.

For Families: Saving money is the primary way to prepare for the costs of college. By setting aside a certain amount each month or payday, your family can build up a viable fund for college. For instance, investing just $100 a month for 18 years will yield $48,000, assuming an 8% average annual return. In addition, if parent and child begin saving early, the amount you have to set aside each month will be smaller. Regardless of the amount you can afford to save each month, it is important to consider what savings or investments will minimize risk while maximizing the return on your money. Some of the most common investments are described below. Several ways to approach this as the article mentions, we started saving for our kids college costs when they were born. We have gradually increased the monthly savings rate as they got older and I could afford to do so. Several articles that I have read all point out that the parent should not take out the loans to pay for the childs education. As the parent of a college student you are most likely 38 to 48 years old and should be thinking about retirement. Taking on an additional $100K in debt as you push toward retirement will not help you sail into retirement easily.

Coverdell Education Savings Account (CESA)

Formerly called Education IRAs, the Coverdell Education Savings Account helps families save money for the education expenses of a child. One important difference between a CESA and other education savings plans is that funds can be used to pay for primary and secondary (K-12) education as well as higher education. This provision is set to expire in 2010 unless Congress passes a law to extend it. The CESA allows you to make an annual non-tax-deductible contribution of $2,000 per child into an investment trust account. As the funds in the account grow, they are not subject to federal taxes. Additionally, withdrawals for qualified education expenses are also free from federal taxes (although they are usually not free from state taxes). Qualified expenses include tuition, books, and fees at an eligible educational institution. Contributions must be made in cash before the child reaches age 18. Anyone can contribute, including grandparents, family, friends and even the student, as long as the income qualifies. To qualify for a full or partial contribution, the contributor's adjusted gross income must be less than $110,000 if single and $220,000 if married. Funds are controlled by the account owner at all times and can be used for education expenses of a sibling if the money is not used for the originally intended beneficiary. To learn more about a Coverdell Savings Account, speak to a financial advisor. This is a plan that my wife pointed out to me a long time ago. We have not done this yet but we should. It is an excellent way to help defer the cost of private K12 educational expenses.

529 Savings Plans

Now, no matter what state you live in, there is a 529 program available for you to begin investing in. These state-sponsored plans help families set aside funds for future college costs. Commonly referred to as "Section 529" plans (after the Internal Revenue Code that authorized them) these come in the form of either prepaid tuition plans or savings plans. The 529 prepaid tuition plan allows you to pay now at today's rates for school tomorrow. Your account is guaranteed to pay for tuition and fees at public universities and colleges in the state by the time your child graduates from high school. Room and board is not covered in a prepaid tuition plan. While you may use a prepaid tuition plan to pay for a private or out-of-state school, you may risk forfeiting some of your plan's value to do so.

The 529 savings plan, on the other hand, allows the full value of your account to be used at any accredited college or university. The 529 savings plan also covers all qualified higher education expenses, including room and board. Each state determines its plan design, including what the maximum contribution per student per year will be. Investments in 529 plans grow tax-deferred until the child is in college, at which time they will be subject to the child's presumably low tax rate. Distributions to pay for the student's college costs are federal tax-free, and individual states may offer additional tax breaks as well. To learn more about 529 Savings Plans, speak to a financial advisor. We finally have a 529 for our childern. Thanks to my father in law who got of the dime and got it done. He contributed some and we did also. Now we can look forward to tax free growth on these savings.

Saving isn't the only way to pay for college. Federal, state and private grants and loans can bridge the gap between your savings and tuition, even if you think you make too much to qualify.

I hope you enjoyed this post. If you have a question or a idea make sure you leave a comment and I will try to research it and write about it. Final thought if you enjoyed this post why not Subscribe to Strategies for Life its free.

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