Independent Branch Leader and Financial Consultant Charles H. Schwab & Co.
TERRE HAUTE —
The new school year has begun so I thought it would be good to talk about college savings. According to the Charles Schwab study of Engaged Investors, 88 percent of engaged Americans say it’s important for parents to be active in their children’s education. One way parents can get involved early is by looking ahead and planning for college. With rising tuition rates, this can be overwhelming, but luckily 529 plans offer several benefits that make saving for college easy.
For the 2011-2012 school year, according to CollegeBoard.org, the cost of college including tuition, fees, books, room and board and other expenses, averaged about $21,450 at an in-state public university and about $42,225 at a private school.
While these numbers may seem outrageous, remember that saving for college is like saving for retirement — by starting early, investing regularly and contributing as much as you can afford, you give yourself the best chance to succeed. The good news is that there are resources out there to help people meet the goal of saving for a child’s education, like college savings accounts and tax credits.
How much do you need to save?
As with any aspect of a financial plan, the best place to start is with an understanding of your specific goals — in this case, roughly how much might you need to have saved to pay for a college education? According to the Schwab Center for Financial Research, here are some approximate numbers you might be facing for four years of college tuition:
n If you expect your child to begin college in two years, the estimated cost of a public in-state school is $111,800, a public out-of-state school is $177,000, and a private school is $220,000.
n If you expect your child to begin college in 10 years, the estimated cost of a public in-state school is $178,200, a public out-of-state school is $282,100, and a private school is $350,600.
n If you expect your child to begin college in 18 years, the estimated cost of a public in-state school is $284,000, a public out-of-state school is $449,700, and a private school is $558,000.
These numbers assume a hypothetical six percent average annual increase in tuition, fees, books, room and board, and other expenses, and the actual rate of increase will fluctuate with market conditions, so they are just for illustrative purposes, but they paint a rough picture of what college savings goals might look like.
Once you have an idea of what your savings goals are, the next step is to understand the saving and investing accounts available to you. The government has established two kinds of accounts to help people save for college expenses — 529 plans and Education Savings Accounts, also known as Coverdells.
A 529 plan is a state-sponsored program that allows parents, relatives and friends to invest for a child’s college education. Generally, you can choose from a selection of age-based or static investment portfolios that are professionally managed by the program’s fund manager. The account belongs to you, not your child, and any potential earnings grow tax-deferred — which means that your money has a chance to compound faster because you don’t have to pay taxes on current investment income or capital gains. What’s more, you pay no federal taxes on withdrawals as long as they’re used to pay for qualified educational expenses.
An Education Savings Account (ESA) is managed by you on behalf of your child. You can invest the money you contribute to an ESA in stocks, bonds, mutual funds, etc. When your child turns 18, you can choose to hand over control or continue managing the account yourself. ESAs provide tax advantages similar to 529 plans in that your money grows tax-free and you pay no taxes on withdrawals if they’re used to pay for qualified educational expenses.
Many parents think of financial aid as free money for college, but the fact is that aid often comes in the form of loans, which must be repaid with interest.
A college education has become one of the largest expenses you and your child will face over the course of a lifetime, so don’t attack such a significant financial issue blind. While it may seem like an insurmountable goal, you will put yourself (and your child) in a better position for success by starting early, developing and sticking to a plan that makes sense for you situation, and making the best use of all the resources and tools available.
If you would like to discuss further your options for college funding, please contact me at 812-234-1400.
Investing involves risk, including possible loss of principle. The information above is not intended as individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.