It's that time of year when students across the country are graduating from
college. It took a lot of effort to earn those degrees, but it took
something else, too - money. It's this financial aspect of college that may
concern you if you have children. How can you take some of the stress out
of paying the high costs of higher education?
To begin with, it pays to be informed about what college actually does
cost. Consider these figures from the College Board's 2007-2008 Trends in
College Pricing: The average total expense (including tuition, fees, room
and board) is $13,589 per year for in-state students attending four-year
public colleges and universities; for students attending four-year private
colleges and universities, the average total cost per year is $32,307. And
over the past several years, college costs have been rising faster than the
general inflation rate, so you can expect to pay considerably more in the
future.
How can you cope with these costs? You could tap into your Roth IRA or take
a loan from your 401(k). But do you really want to potentially lower the
resources you'll have available for retirement? Alternatively, do you want
your children to start their working lives saddled with heavy student
loans? (The average student loan debt is $21,000, according to the Project
on Student Debt.)
The best way to avoid either of these scenarios is to start saving for your
children's college education when they are young - and to use a savings
vehicle specifically designed for college funding.
One such vehicle is a Section 529 savings plan. With this plan, you put
money in a specific pool of investments. Contribution limits are high -
more than $300,000 per beneficiary in many state plans, although special
gifting provisions may apply. Plus, Section 529 savings plans provide you
with a degree of flexibility, in that you can change your plan's
beneficiary to another family member. This can prove quite useful if you
have one child who decides against college while another one wants to go.
Furthermore, all withdrawals are free from federal income taxes, as long as
the money is used for a qualified college or graduate school expense of
your child or grandchild. However, Section 529 withdrawals for expenses
other than qualified education expenditures may be subject to federal,
state and penalty taxes. (Also, distributions will appear as income on the
child's tax return, which could affect financial aid calculations.)
Not all Section 529 savings plans are alike; some have high fees and
limited investment options. Because it's not always easy to compare the
benefits of different plans, you may want to get some help from your
financial advisor. As a (very) general rule, though, you may want to start
by looking at your home state's plan, which might come with a tax deduction
or a matching contribution, up to a certain dollar amount. And even if you
sign up for your home state's plan, your child doesn't have to stay in
state for college; you can apply the money to virtually any accredited
school.
By starting to save early, and by taking advantage of an appropriate
college savings vehicle, such as a Section 529 plan, you can prepare to
make that Graduation Day of the future a happy one for everyone concerned.
