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Cents and Sensibility Guy Steele |
Prevent college
tuition sticker shock
by saving aheadIN a couple of months from now, students will be heading to college -- and their parents, with varying degrees of gloom, will be reaching for their checkbooks. Higher education carries some high costs -- so, if you have children or grandchildren, you'll want to prepare yourself.
Just how expensive is college? During the 2003-2004 academic year, the average total charges -- tuition, fees, room and board -- at a four-year public institution was $10,636, while the comparable average cost for a four-year private school was $26,854, according to the College Board. And college costs have been rising faster than the general rate of inflation; when your child is ready to move into the dorm, you could be looking at numbers considerably bigger than these.
To help pay these hefty bills, you may want to consider some college-funding vehicles.
Section 529 plans are available as pre-paid tuition programs or savings plans. In a pre-paid tuition account, you buy future tuition credits at an in-state, public school. In a savings plan, you put money in specific investments, which are managed by the plan administrator. Savings plan contribution limits are typically quite high, and all withdrawals are free from federal income taxes, as long as the money is used for qualified college or graduate school expenses. Withdrawals for expenses other than qualified education expenditures may be subject to federal, state and penalty taxes. Contributions are state income tax deductible in certain states for residents who participate in their own state's 529 plan. On the issue of tax benefits, be aware that the tax benefits for 529 plans are effective through 2010 unless extended by Congress. These plans also could reduce a beneficiary's ability to quality for financial aid. And because tax issues for 529 plans can be complicated, please consult your tax adviser.
Depending upon your income level, you can contribute up to $2,000 annually to a Coverdell Education Savings Account. Your Coverdell earnings and withdrawals will be tax-free, provided you use the money for qualified education expenses. (Any non-education withdrawals from a Coverdell Account maybe subject to a 10 percent penalty.) You can fund your Coverdell Education Savings Account with virtually any investment you choose.
By investing in the savings vehicles described above, you can go a long way toward insulating yourself from the "sticker shock" you may feel when you send your kids off to college. As with virtually all investments, however, these work best when you put a lot of time in them -- so start saving soon.
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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, Hawaii, 96734, or call 254-0688