This time of year finds us wrapping up family trips and sending children back to school. While adults can hardly remember what it was like to have a three-month-long summer vacation, they won’t soon forget another part of back-to-school season: the hefty bill as they send older children off to college.
Is your family prepared for the financial commitment that university requires? Here are some ways to start saving now so you can afford tuition payments in the future:
One of the most popular college savings options today are state-sponsored investment programs called 529 plans (named after its section number in the IRS code). The state sets up the plan with an asset management company of its choice, and allows citizens from any state to open a 529 account according to the state’s predetermined plan features. Account owners don’t deal directly with the state, but rather with the asset management company.
With 529s, you deposit after-tax money, but earnings are free of taxes as long as you spend them on higher education-related expenses, including tuition, room and board. There are no income limitations on who can contribute and most plans let you save in excess of $200,000 per beneficiary.
Utah’s 529 program is widely regarded as one of the nation’s best. Learn more at uesp.org.
While you can choose a portfolio type with a 529 plan, some investors prefer to manage their own portfolio. Since tuition costs are rising faster than inflation, investors may want to consider a portfolio heavily weighted towards stocks while their child is young. Assets can be allocated into lower-risk investment vehicles like bonds, money market accounts and cash as the child gets closer to college age.
Whatever strategy you choose, choose quickly and start investing! Investing just $100 a month for 18 years will yield $48,000, assuming an 8 percent average annual return.
There are several different types of savings accounts that are designed especially for college savings. Many banks offer a child or student savings account with incentives like higher interest, monetary rewards for good grades or matching funds when savings goals are met. This is a good place for your children to contribute, as they will see tangible results from their savings efforts.
Coverdell Education Savings Accounts (formerly known as the Education IRA) are another option that allow contributions up to $2,000 per year and tax-free withdrawals. There are, however, limitations: gross income may not exceed $220,000 if you’re married and filing jointly, and the annual contribution cap per child is $2,000.
If you decide to go with one of the above savings account options, be sure to ask your bank about automatic transfers, which will automatically move money from your checking account into your designated college savings account at regular intervals.
Many families choose to finance college with savings, loans and current income, but with conservative estimates putting the cost of a four-year public university in 15 years at about $100,000 or more (an Ivy League school like Harvard is estimated to be closer to half a million dollars), it is up to parents and their children to plan accordingly. The key is to take action and start saving today.