Financial Focus/Start Studying College Savings Strategies
Very soon, students will be heading to college - and their parents, with varying degrees of gloom, will be reaching for their checkbooks. Higher education carries some high costs - so, if you have children or grandchildren, you’ll want to prepare yourself.
Just how expensive is college? During the 2003-2004 academic year, the average total charges - tuition, fees, room and board - at a four-year public institution was $10,636, while the comparable average cost for a four-year private school was $26,854, according to the College Board. And college costs have been rising faster than the general rate of inflation; when your child is ready to move into the dorm, you could be looking at numbers considerably bigger than these.
To help pay these hefty bills, you may want to consider a couple of college-funding vehicles:
_ Section 529 plans - Section 529 plans are offered as prepaid tuition plans or college savings plans. Many states now offer both options.
If you choose a prepaid tuition plan, you can lock in future tuition at in-state public schools at today’s prices. So, if you’re certain your future collegian will be attending State U, a prepaid tuition plan may be right for you.
Most people, however, find that a college savings plan offers greater freedom. You can use the plan to pay for tuition at virtually any college or university, in any state.
In a savings plan, you put money into specific investments that are managed by the plan administrator. If you participate in your own state’s Section 529 plan, you may be able to deduct your contributions from your state income taxes. Savings plan contribution limits are typically quite high, and all withdrawals are free from federal income taxes, as long as the money is used for qualified college or graduate school expenses. Withdrawals for expenses other than qualified education expenditures may be subject to federal, state and penalty taxes. (Section 529 tax benefits are effective through 2010, unless extended by Congress. Also, a Section 529 plan could reduce your child’s or grandchild’s ability to qualify for financial aid. Because tax issues for Section 529 plans can be complicated, please consult your tax adviser.)
_ Coverdell Education Savings Account - Depending on your income level, you can contribute up to $2,000 annually to a Coverdell Education Savings Account. Your Coverdell earnings and withdrawals will be tax-free, provided you use the money for qualified education expenses. (Any non-education withdrawals from a Coverdell account may be subject to a 10 percent penalty.) You can fund your Coverdell Education Savings Account with virtually any investment - stocks, bonds, certificates of deposit, etc.
You can open Coverdell accounts for all your children or grandchildren, although you cannot contribute more than $2,000 per year to any one account. Other people also may establish Coverdell accounts for your children or grandchildren, although the total annual amount contributed must not exceed $2,000 per beneficiary.
Start Saving Soon.
By investing in the savings vehicles described above, you can go a long way toward insulating yourself from the “sticker shock” you may feel when you send your kids off to college. As with virtually all investments, however, these work best when you put a lot of time in them - so start saving soon.
This article was submitted by the financial representatives of Edward Jones in Hagerstown: Greg Garner, AAMS, 301-733-9465; Dave Walker, AAMS, 301-766-7300; Joan Bowers, 240-420-8514; John R. Pullaro, 301-824-7726; and Todd Streett, 717-597-1713.