Financial Planning, Retirement Plan, 401k, Investment Blog

Financial Planning, Retirement Plan, 401k, Investment Blog

Saving Up For Your Child’s College Education

Posted February 18, 2009 by Bernz

College can be one of the highest expenses a family ever faces. College tuition continues to climb every year with the average in-state annual tuition for public colleges costing $6,700 and $25,000 for private colleges. It is estimated that college tuition will continue to increase in the foreseeable future.

The best way to take control of saving for your child’s college education is to save early and save lots. While this is simply common sense, there are so many types of college savings plans out there, it can be confusing to choose the one that’s right for your family. Some of the options include:

1. 529 Plan- each state has at least one of these plans. A 529 plan allows you to invest up to a maximum amount of funds each year that are allowed to grow tax-free until the child attends college. The funds can then be withdrawn tax-free at the federal level. There may also be tax credits in your state to offset the state tax that may be payable on the investments growth.

2. Prepaid Tuition Plan- this is another type of 529 Plan that is offered in some states. A prepaid tuition plan guarantees that your investment will grow at the same rate as in-state college tuition fees. So, for example, if you invested one year’s worth of tuition fees (say, $5,000) in the plan this year, you will have paid for one year’s tuition when your child is ready for college, regardless of what that costs at the time.
3. Private Savings Account- tucking money aside in a savings account has the benefit of being more flexible than tax-deferred plans which have limits on contributions and withdrawals. However, the income on a private savings account will be taxed every year. That tax will reduce the overall return on the account which makes private savings accounts a poor substitute for a 529 plan.
4. Borrowing- another way to fund college is to borrow the money when it comes time to pay tuition. The downsides to this plan are many. Because you do not know what your future financial situation will be, it is difficult to gauge whether you would be eligible for loans. The interest paid on the loans may or may not be deductible depending on your state and the tax laws at the time.

I have two kids ages 14 and 16 and currently in High School. In 3 years both of them will be in College and me and my wife have been seriously saving for their college education.

Taking the time when your children are young to set up a college savings plan will pay dividends in the future.

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One Response to “Saving Up For Your Child’s College Education”

1. 
   Johanne Says:
   February 19th, 2009 at 2:27 am

   “Taking the time when your children are young to set up a college savings plan will pay dividends in the future.”

   That is very good advice. It’s always better to save as much as you can rather than depend too much on student loans.

   It’s unfortunate that American society has become too credit happy. But then again, we wouldn’t be in this financial crisis if it weren’t for a collective lack of discipline when it comes to borrowing money.

   We reap what we sow I guess.

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