Cents and Sensibility

Guy Steele

Don’t let college loans
overwhelm your child

For millions of kids, summer vacation is almost here. If you have children in school, you're now one year closer to the time when you send them off to college. And if you haven't started saving for that day, now is definitely the time to start -- because college costs keep going up.

Let's look at the hard facts, as reported by the College Board. In the 2002-03 academic year, the average tuition and fees at a four-year private college was $18, 273; the corresponding figure for a four-year public school was $4,081.

Knowing that college is expensive -- and likely to become more so -- what can you do about it? Of course, your child may well qualify for some financial aid in the form of grants and scholarships. And it's in your best interests to look into as many of these options as you can. For help in finding out what's available, contact your local college's financial aid office, or do an Internet search.

Still, even if your child does get some grant or scholarship money, it probably won't be enough to cover all college costs. That's why so many students take out loans.

Initially, you might think that taking out a loan or two isn't such a bad thing. After all, the rates are competitive, and the interest may be tax-deductible. But consider this: In pursuit of their degrees, students now borrow, on average, $27,600, according to a new survey by Nellie Mae, a major student loan agency.

No matter how you look at it, that's a lot of money -- and it's an especially heavy burden for young people to bear as soon as they leave school. This debt load can keep college graduates from buying houses and making other important investments in their lives.

So, how can you help keep your college-bound kids as debt-free as possible? Start by saving early. Consider tax-advantaged vehicles such as a Section 529 plan or a Coverdell education savings account.

When you establish a Section 529 college savings plan, your earnings and withdrawals are exempt from federal taxes, as long as the money goes toward paying qualified college costs. And you can contribute large amounts to your 529 plan. In fact, some plans allow you to put in as much as $250,000 per beneficiary. You also have the option of setting up a Section 529 plan as a pre-paid tuition program.

You might also want to look at a Coverdell education savings account, formerly known as the Education IRA. Depending on your income level, you can contribute up to $2,000 annually per beneficiary to a Coverdell account. And, as is the case with a Section 529 plan, your earnings and withdrawals are tax-free, provided you use the money for qualified education expenses. Also, you can now use qualified withdrawals for kindergarten through high school, as well as college.

Coverdell accounts and Section 529 plans can go a long way toward reducing your child's dependence on student loans. By making the right moves, you can help your children get off to a debt-free start in their adult lives. And that's a great graduation present.

See the Columnists section for some past articles.

Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at:


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