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COLLEGE SAVINGS
As we head into spring, college-bound high school students are waiting for a letter of acceptance from their school of choice. Their parents, however, are waiting for the tuition bill. The average cost of a four-year private college now totals $22,500 a year. As these costs continue to rise, planning for college must begin long before high school graduation.
THAT MONEY SHOW asked Kristin Davis, Senior Associate Editor of KIPLINGER'S PERSONAL FINANCE, for some ideas on how to begin saving and investing for this expense. She gave us some these tips to help you get started.
A easy way to start a college fund is to take a holiday or birthday gift and put it in a mutual fund or another managed investment vehicle. This is a good way to begin learning from the pros.
Look for any money you can squeeze out of your budget, and keep adding to the original funds. For instance, if you've recently quit smoking, you'll be saving more than a hundred dollars each month. Consider applying this money to the investment. Over time, that can add up to many thousands of dollars.
Remember that you probably won't be able to provide every penny your child will need for college. When the time comes, a patchwork of resources will come together to cover the expenses. Your child may qualify for grants, financial aid, scholarships, housing stipends, and, as a last resort, student loans. Together with your savings, these should meet your needs. The more you save, the less you'll have to borrow.
Another great way to get started is by enrolling in a state-sponsored college savings plan (also known as a 529 Plan). More than half the U.S. states have them, and your own state may give you some tax advantages for using the plan. Otherwise, you can choose a plan from any of the participating states. Here's how it works: Put money into an account like a mutual fund. It is allowed to grow tax-deferred until it is used for college. When funds are withdrawn from the account, it is taxed to the student, in the student's tax bracket. The benefit is that you get the tax advantage, and the parent maintains control of the account until the student goes to college. The downside is that once you choose an investment track up front, you have to stick with it for the duration. So this type of investment might not be a good choice for aggressive investors who want a lot of control over the funds.
Parents can also save college money under their own names or in the child's name. While there are some tax advantages in putting it under the child's name, if you have a modest family income and your child would qualify for significant financial aid, having assets under the child's name will reduce that eligibility. In such a case it would be better to keep the money under the parent's name.
If you are investing money for your child's college education, consider keeping most of the investment in stocks until the child reaches high school age. At that time, look for opportunities to transition your money into bonds, which will provide lower interest but significantly more stability and security. That way, you'll be sure the money is there when your child goes to college.
For more information about state-run college savings plans, read "College Bound," an article written by Kristin Davis for Kiplinger's Personal Finance.
For a great college savings calculator, and articles that will help you plan for the future, visit the TIAA-CREF Web Center's College area.
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