Saving for Your Child's College Expenses

Understanding Your Options and Needs

Saving for Your Child's College Expenses
March 2, 2013

Saving for Your Child’s College Expenses

When you have children, you ultimately hope that they will excel in all aspects of their lives, including work, relationships, and finances. Nowadays, it is widely accepted that in order for your children to be successful in adulthood, they first need to go to college and obtain a degree (or several). In doing so, they will have a better chance of obtaining that prestigious, high-level executive job with a large income to match. That, in turn, can lead to other achievements such as a large home in an affluent neighborhood, the ability to travel, and a happy marriage with children.

Let’s assume that you choose to put your child through the public school system for which you do not pay tuition. In this scenario, you will not pay tuition for private school from the time your child is eligible to attend until s/he turns eighteen and heads off to college.

Cost of college

So, how much does it cost to put your son or daughter through four years of college, and how can you pay for this? As you are about to see from the following figures, and as you probably know, a college education is by no means cheap, so let’s have a look at this in a little more detail.

First, you need to decide whether your child will attend a public college or a private college, as there is obviously a significant difference in cost, For instance, at the present time, public college tuition fees average about $8,655 per year, but the average at private college is $29,056 per year. When you take into account the associated living costs, the total average cost of a public college education at an in-state college is about $18,000 per year and $31,000 per year at an out-of-state college. At a private college, the total average cost of your son’s or daughter’s education may be around $39,500 per annum — this is even higher in certain regions or in more prestigious universities.

Of course, this is only true in today’s financial climate, and these numbers will change significantly by the time your child goes to college in the future, whenever that may be. In just the last 12 months, public college fees have increased by an average of 4.8%, and private college fees have gone up an average of 4.2%.

Second, when estimating the total cost of college, you also need to consider whether you will be expecting your child to contribute to his/her own college tuition by way of a student loan and/or a part-time job. Finally, you may also wish to look into the state and other government benefits that are available, such as tax credits, albeit these are typically minimal.

How are you going to pay for college?

Now that you have a better idea of what you will need to pay over a four-year period when your child attends college, there are a number of available options, including:

  • Borrow: You could borrow the funds by increasing your mortgage or taking on a loan at the time your son or daughter starts college, but why not save some money instead of paying interest?
  • Prepaid tuition plans: If you have the funds available now to pay for your child’s future college tuition, then you can do so — but at today’s price. Alternatively, you can just pay for a portion of the program’s fees.
  • Coverdell education savings accounts (ESA) : You can contribute up to $2,000 per year of taxed income into a savings account without being taxed on any interest earned or any money withdrawn and used for educational purposes.
  • IRA and Roth IRA accounts: Both types of investment accounts allow you to save for your child’s college tuition as well as for your own retirement in a tax-efficient manner.
  • 529 college savings plans: A 529 college savings plan is an ideal way to save money for your child’s college tuition and associated fees (e.g., living expenses) in an extremely tax-efficient manner, as the funds are allowed to grow without any form of tax being payable. Moreover, you will not be taxed on any withdrawals that are made for higher education purposes.

    Because the money you contribute to such a plan is counted as a gift, you can contribute up to $13,000 per year, which is the amount of your gift tax exclusion. However, it is also worth noting that under the gift tax law, you are allowed to use up five years of your gift tax exclusion in a single year. This means that you can potentially put up to $65,000 in a 529 college savings plan in the first year but not add to it for the next four years. A married couple can contribute up to $130,000.

    It is not only a child’s parents who can contribute to this type of plan. It can be used by grandparents to transfer money out of their estate — tax free — into the account for their grandchild’s benefit.

    Moreover, these plans are quite flexible, and contributions can be as low as $25. There is a lifetime amount that you are limited to contributing that varies between states, however, but it tends to range from $235,000 to $380,000. When the funds are required, they can be used at any public or private college to cover accommodation, books, tuition fees, and equipment.

Hopefully, this article has given you food for thought. The important thing is to start saving at the earliest opportunity to give whichever investment/s you choose the chance to start growing as quickly as possible.

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