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Saving for College
Planning for College Costs? Be Sure to Do Your Homework
By Jane Levine
CFP and Registered Principal, Linsco/Private Ledger Corp.
Most people agree that an investment in a college education is money well spent. But finding the money to pay for escalating education costs is not easy. According to The College Board, the cost of putting a student through college rose at a rapid pace again this year, averaging $27,516 a year at private, four-year schools and $11,354 at four-year public colleges. And if that figure isn’t sobering enough, consider this: By the time today’s newborn enters college, a four-year degree at a public college could cost more than $112,000 — tack on an additional $160,000 for a private college. (This example assumes a 5% average annual increase in costs, which represents the weighted average increase for all colleges for the last 10 years, ended December 2004.)
Don’t despair just yet. Even if you are getting a late start, a sound investment strategy, coupled with knowledge of other college financing resources, may help put you and your children on the road to realizing one of life’s important dreams.
The Best Strategy: Start Early and Save Consistently
As with any major financial goal, the first step is to determine how much you will need to accumulate. In this instance, you’ll want to base your strategy on each child’s current age, then develop a plan, and stick with it. The earlier you start and the more consistently you save, the better your chance of meeting your goal.
Goal: Final Tuition Bill Due in 12 to 22 years
With time on your side, your portfolio can potentially withstand some volatility in your quest for higher returns. Therefore, you might want to consider investing the majority of your college savings in stocks, as these investments have historically provided the greatest long-term growth potential. Of course, past performance can’t guarantee future results. Remember the volatility involved in stock investing, and consider your ability to wait out potential fluctuations in the value of your child’s college nest egg.
Goal: Final Tuition Bill Due in 8 to 11 Years
In addition to keeping your portfolio aimed toward growth with stocks and stock mutual funds, you might want to add or increase a fixed-income element to balance risk. Now is probably a good time to teach your child about investing by encouraging them to contribute a portion of the dollars earned through allowances and babysitting into the college savings plan.
Goal: Final Tuition Bill Due in Less Than 8 Years
You may start allocating more of your portfolio to fixed-income and money market investments. If you have virtually nothing saved, you have a challenge ahead of you, but some cost-cutting in other areas of your life might allow you to make substantial monthly investments.
Remember that any investment plan needs to be reviewed every year or so to determine if adjustments need to be made. Generally, changes should be made as your time horizon narrows and the day nears when you will send your child off to college.
Other Financing Options
In addition to the age-based goals outlined above, consider these options:
Gifts of savings: When relatives ask what your children want for birthdays or holidays, encourage them to give gifts that will help finance their education such as Series EE Savings Bonds; shares of a mutual fund given through the Uniform Gifts/Transfers to Minors Acts (UGMA/UTMA); and zero-coupon bonds that mature in a given year around college enrollment. Parents or others can contribute up to $2,000 annually (per child) to a Coverdell Education Savings Account where earnings accumulate tax-free and withdrawals can be made tax-free for qualified education expenses. An individual can make annual gifts of up to $11,000, gift tax-free, to a minor under UGMA/UTMA. Make sure you understand the tax implications of each of these giving vehicles so you’re not caught off guard by Uncle Sam.
Section 529 Plans: These are state-sponsored plans that allow individuals to invest in a predetermined investment pool and offer flexibility on when contributions can be made. All qualified higher education expenses are federally tax-free. Withdrawals may be free of state taxes for residents of states that allow this benefit.
Apply for financial aid: Even if you think you’re ineligible for financial aid, complete the applications and mail them in on time. According to a 2004 College Board study, there was more than $120 billion in financial aid available, during the 2003-2004 school year, the most recent year studied.
Don’t rule out less expensive schools: Public universities and community colleges can be among the best options. Higher education is certainly one area where most expensive does not necessarily mean best.
Develop networks and ask questions: High school guidance counselors, religious and civic organizations and the colleges your child applies to can all provide good leads for additional sources of scholarships, grants and loans.
Together, time and a smart investing strategy are your best bets for helping to provide your children with a priceless investment: a college education.
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