College Saving and Investing Strategies
Even with relatively low general inflation in recent years, in-state public college costs have continued to soar, rising at an average rate of nearly six percent per year beyond the rate of general inflation. The total cost of one year of in-state college education (tuition and fees only) at a four-year public university now averages $8,244, up 8.3% from a year ago. Add room and board and the total jumps to $17,131, up 6% from 2010-11.*
Despite the cost, obtaining a college degree may still be a worthwhile goal. According to the U.S. Census Bureau, college graduates earn more money than individuals who just have a high-school diploma: The average annual salary for a college graduate with a bachelor’s degree is $51,206, compared to an average salary of just $27,915 for a high school graduate. The average salary for an individual with an advanced college degree is $74,602.- Backup?
One of the greatest gifts a parent or grandparent can give a child is the ability to graduate from college with little or no debt. Crushing student debt loads can put tremendous pressure on new graduates and saddle them financially for many years to come.
The Sooner, the Better
The fact is, it’s never too early to start saving for your child or grandchild’s college education. The sooner you start saving, the more time you have to accumulate money, and the greater the potential impact of compounding on your savings.
The key is to devise a comprehensive education savings plan for your children or grandchildren as early in their lives as possible—even if the child was just born. This will help increase the chances that sufficient funds will be available when it’s time for them to start their college educations. Among the most popular education savings vehicles available to families today are:
• Section 529 Plans— These have become the college savings plan of choice for many Americans families. Operated by states or educational institutions, they come in two forms: prepaid tuition plans and investment savings plans. Sec. 529 plans allow tax-deferred growth and tax-free distributions if the funds are used for qualified education expenses.
• Coverdell Education Savings Accounts (ESAs)— You can contribute up to $2,000 a year to a Coverdell ESA on behalf of your child or grandchild. Like contributions to Sec. 529 plans, Coverdell ESA contributions grow tax-deferred and can be withdrawn tax-free if used for qualified education expenses.
Note, however, that the money doesn’t have to be used for educational purposes. If the child doesn’t attend college, or receives scholarships and/or financial aid and doesn’t need the money for college, he or she will receive the money as a distribution.
• Zero Coupon Municipal Bonds— Unlike most other bonds, zeros do not make periodic interest payments. Instead, investors receive a payout of the full face amount of the bond at maturity. The predictability of the payout can make a zero coupon muni bond ideal for education funding, since you can structure the maturity to coincide with the start of your child or grandchild’s college education.
• Roth Individual Retirement Accounts— While Roth IRAs are usually thought of as retirement savings tools, many families today are also using them to save for college. This is because Roth IRA contributions (but not earnings) can be withdrawn for any purpose, at any age, without tax or penalty, including paying for college or private school. So one strategy is to withdraw Roth IRA principal for college and leave the earnings in the account for retirement.
For help in determining how much money you may need to save for your children’s or grandchildren’s college educations, check out the David Lerner Associates Education Planner by visiting http://www.davidlerner.com/education-planner.aspx.
*Source: The College Board, Trends in College Pricing
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