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How to Prepare for the
$100,000 Price Tag
If you're the parent of a newborn or young child,
you've probably heard the depressing estimate of the
cost of a college education when your child is ready
to enter college 18 years from now. The cost of four
years in a public college is expected to cost in
excess of $100,000; a private school, over $200,000.
What's a parent to do?
Start Now!
The sooner you start investing for your child's
education, the better. As with any other investment
goal, time is your best friend.
Have a Plan
The first step in making a plan is to estimate what
the total cost of your child's education is likely to
be. The average in-state tuition for a public school
now averages over $10,000 per year. At five percent
inflation per year, the estimated cost per year 18
years from now would be around $24,000 (10 years from
now the cost would be approximately $16,000).
Private schools can be two to three times as
much.
Don't let these numbers scare you into inaction. Some
of your child's education can be paid for through
scholarships, financial aid, and student loans. It's
possible to save the rest if you start early,
contribute regularly, and invest wisely.
The only thing worse than not saving at all is putting
your money in a passbook savings or money market
account. In order to amass enough money to finance
four years of college, you need to not only start
early, but invest aggressively. Stock funds
historically have almost always exceeded other
investments over periods of ten years or more. Look
for no-load (no fee to purchase or sell) mutual funds
with low expenses. Refer to Money Magazine's
semi-annual mutual fund listing that includes
information on expenses and performance for thousands
of funds.
Don't just park your money in a fund or two and leave
it. Review the performance of the funds at least
annually, and make adjustments as necessary for
under-performing funds. When your child is five years
from starting college, begin to shift your money into
growth and income stock funds and bond funds, reducing
your exposure to market ups and downs while still
aiming for high returns.
Two to four years before your child is due to start
college, cash in enough stocks and bonds to pay for
the first year, and put it somewhere safe and
accessible, like a money market fund. If you wait
until just before you need the money, you may be
forced to take it out at a time when market
performance is down, thus losing some of your
earnings.
When trying to come up with the money for your child's
college education, a combination of financing methods
will probably work best. Be sure to take advantage of
any tax-deductible methods that you're eligible for.
Some of the available financing methods include:
If you'll be 59 1/2 when your child is in college, a
Roth IRA may be an attractive investment vehicle,
because withdrawals will be tax free (assuming you've
had the account for at least five years).
Even if you'll be younger than 59 1/2 when your child
is in college, there are benefits to Roth IRAs. You
can still withdraw your contributions without paying
taxes or penalties, and earnings can be used to pay
for college expenses without a penalty, although you
will have to pay taxes.
The proceeds from Education IRAs aren't taxed, but
your contributions are limited. While this might help
pay for some college expenses if you start when your
child is very young, it will never cover the cost of a
four-year degree.
The Hope Scholarship Credit allows a deduction of 100
percent of the first $1,000 of qualified tuition and
fees and 50 percent of the next $1,000, up to a
maximum of $1,500 per year. The credit is phased out
at certain income levels. Like the Education IRA, this
credit by itself will not go very far towards
financing a college education.
State college savings (529) plans, on the other hand,
give you the opportunity to earn stock-market returns
on college savings you don't need for several years.
Contributions grow tax-deferred until the money is
used to pay for college, then earnings are taxed at
the student's tax rate, another attractive benefit. If
the money isn't used for college, however, there can
be a penalty of 10% to 15% of your accumulated
earnings or 1% of the account balance.
Pre-paid tuition plans, another type of 529 plan, are
attractive when tuition rates are rising around 10% a
year, but they limit your growth to the rate of
public-college tuition increases in your state, so
when tuition increases level off at 4 to 5%, these
plans are no longer very attractive vehicles for
financing a college education.
Life insurance policies are sometimes used to finance
a college education, but some experts say this is not
a good method for most people. Although variable life
insurance policies include tax-deferred investment
options, there are significant costs for the life
insurance, sales commissions, and management fees,
reducing your earnings. This option may only be viable
for those in the 28% or higher tax bracket who will
probably not qualify for financial aid.
If you start early, know your alternatives, develop a
plan, and invest wisely and regularly, it IS possible
to pay for your child's college education.
By About Financial Planning
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