College Tuition Saving for Your Child

The ABCDs of Planning For Your Child's Education

by Scott Vineberg and Craig Steinhauer

Steadily rising tuition costs have many parents feeling that paying for college is tougher than ever. At the same time, statistics trumpet the value of a college education. College graduates make an average of 81% more annually than workers with just a high school diploma, according to a recent U.S. Census Bureau study.

So what can parents do? Learn their ABCDs!

Save early and often:

Regardless of how you choose to invest, you should begin saving as soon as possible.

Kids usually start college around age 18. If you invest $150 a month from their birth until your child turns 18, earning a hypothetical 9% return*, you will have slightly more than $80,000. That's about what 4 years of college will cost in 18 years at a school that runs $10,000 per year now.

If you wait until your child enters college, then take a loan, you might borrow $80,000 for 15 years at a hypothetical interest rate of 6%. Your monthly payments will be about $686. In all you'll spend about $123,000. Compare that to only $32,400, the total of your monthly savings contributions. You'll save almost $90,000 by planning ahead!

* Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment. They do not include consideration of taxes.

Be Disciplined:

You invest with an eye for profits. But it's equally important for parents to understand the risks associated with the investments they choose.

Some parents may be tempted by potentially higher returns in riskier investments. Others may try to time the stock market's highs and lows. In many cases these behaviors are a recipe for disaster.

A competent financial advisor can help parents fathom the risks they are comfortable taking, and then suggest suitable investment options.

Do-it-yourself types can take advantage of web-based resources to help with college planning. One of the web's top sites on college planning, www.savingforcollege.com, has an excellent interactive calculator. You can use it to project college costs for your child and calculate how much you should save.

Consider tax advantaged accounts:

Parents have several choices when it comes to college savings accounts that offer tax breaks, like the Coverdell Educational Savings Account (ESA).

Parents can contribute up to $2,000 annually per child to a Coverdell (subject to income limits) until their child turns 18. Investment selection is very flexible; parents can choose anything from a savings account to an individual stock.

The account grows without being taxed, and earnings will not be taxed when withdrawn, as long as they are spent on qualified educational expenses (under current tax law). Parents can even pay for qualified K-12 expenses. But if earnings are spent on a non-qualified expense, they will be subject to tax and a 10% penalty. So pay attention to how you spend money from a Coverdell.

Parents interested in the opportunity to save even more for college and enjoy tax advantages have other options. That brings us to our next point.

Don't overlook professional advice:

Consulting a professional before choosing a college savings program is a smart idea, just as you would discuss a new physical fitness program with your doctor. Your financial advisor can help evaluate your college savings goals, encourage the discipline to pursue them, and assist in your quest to reach them.