College savings strategies can pay off for parents


❤ Tom Rush


year cost for tuition, fees, and room and board at a private, four- year college in 2009-2010 was $26,975, which is up 7.3 percent from the previous year. If costs keep rising at seven percent per year for 18 years, today’s new- born may spend approximately $404,806 for their degree. The average one-year cost for tuition, fees, and room and board at a four-year public school in 2009- 2010 was $11,445. With fees ris- ing at seven percent for 18 years, that four-year degree at a public institution may cost upwards of $171,750. How will anyone afford it? It won’t


A


ccording to the College Board’s Annual Survey of Colleges, the average one-


be easy, but here are some strategies and steps you can begin taking now. First, start saving. As with any


other major investment, the earlier you start saving, the more you benefit from the rule of compound returns. Let’s consider three scenarios – three families with a baby born in 2010 who send their child to a private university. The first family starts to save immediately. If they invest and receive an 8 percent return per year, they’ll need to set aside $843 per month for the next 18 years to cover the anticipated costs of four years of tuition, fees, and room and board. Their total investment will be $182,088. The second family waits for the


child’s 12th birthday. With an 8 percent annual return, they will have to save $4,399 a month for six years, or $316,728 in total, to pay for the same education. The last family, which doesn’t think about saving until the tuition bill


arrives, will simply have to swallow hard and pay that $404,806 in four “easy” installments. However, starting late is still better than not starting at all. Consider tax-deferred programs.


One way to stretch your tuition dollar is to make use of tax-deferred programs such as the 529 plans(1). These plans work much like 401(k)


plans – except they are earmarked for education instead of retirement. They allow you to set aside money in a special account to grow tax-free. However, not all 529 plans are


created equal. Each of the 50 states sponsors


at least one plan, but they farm out the money management to a professional investment manager. You’re free to choose any plan, but it pays to be choosy. Each firm that manages a 529 plan has its own investment approach, but performance has varied so you must do your homework. Once you’ve picked a plan – or


even multiple plans – it is just a matter of making regular contributions to your account. Many employers make that easier by offering automatic paycheck deductions straight into 529 accounts.


What if you’ve already been


saving money in custodial accounts for the kids’ college bills? Some 529 programs accept


cash from custodial accounts that were set up earlier in your child’s name under the Uniform Gift (Transfer) to Minors Acts. But, you’ll have to liquidate any securities in the accounts – and pay taxes, if any, on the gains – before doing so. When the tuition bills eventually


arrive, all money withdrawn from 529 accounts to pay for qualified higher education expenses is tax- exempt. If your child gets a scholarship,


the government rewards your family by letting you withdraw an equivalent sum, also tax-free, which you can use however you’d like. And, if your family needs to use


the education savings for another purpose, you can always withdraw it and pay capital gains tax – and, in some states, a penalty – on the dividend, if any.


❤


Tom Rush is a wealth advisor with Yuma Investment Group. He can be reached at 329-1700, or online at www.yumainvestmentgroup.com


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