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Good early financial planning key to paying for child's college education

By Keener A. Tippin II

 

It's the first day of kindergarten for your "baby." It seems like just yesterday she was in diapers.

college fundYou've made a list, checking it again and again to ensure she has everything she will need to commence her journey down the long road of education. New outfit, check. Crayons, check. Markers, check. College savings plan… College savings plan?

Yes, believe it or not, it won't be long before this walk to the door of her kindergarten classroom will be a drive to State U. And, as if you didn't already have enough on your mind, consider this: If you haven't initiated financial plans for college by the time your bundle of joy reaches kindergarten, you're about five years too late, according to a Kansas State University financial planner.

Joyce Cantrell, a personal financial planning instructor in K-State's School of Family Studies and Human Services, uses this equation to put into perspective the dangers of procrastination when it comes to setting aside money for your children's college education: If Sylvia put away $100 a month in a mutual fund for her son beginning at birth for 18 years, but John waited 10 years from the birth of his son to begin saving, putting away $225 a month for the next eight years, how much would the portfolio of the $21,600 each had invested be worth when their sons are ready to begin college?

Using today's inflation rate, Cantrell calculates that Sylvia's portfolio would be worth almost $47,000, while John's only $29,963 -- a difference of $17,037.

"That just helps a person understand the power of compounding," Cantrell said. "Even if you can only put away $20 a month and then, maybe over time, increase that amount. The sooner you start, the more opportunity there is for the money to grow."

According to the College Board, the average cost of a four-year education at a public university is currently $42,544 and $107,416 for private colleges. Over the past decade, expenses at public institutions have increased nearly 40 percent, and costs will almost certainly continue to rise. Cantrell estimates that by the time children entering kindergarten in fall 2005 are ready for college, tuition will have skyrocketed to around $55,000 annually.

"That's kind of scary for some people," she said.

It's never too late to begin saving, but late starters must be realistic in their savings goals, Cantrell said.

Parents also have several options available today when it comes to saving for their children's college education.

Several schools now offer prepaid tuition plans that put the brakes on runaway tuition costs by freezing rates at their current level. Unlike the stock market, these prepaid tuition plans are virtually risk free -- you won't lose your money if the market declines, Cantrell said. Not all states, however, offer them and they are often limited to in-state residents.

Another avenue to save for your child's education are Section 529 plans, according to Cantrell. These state-operated college savings plans allow parents, grandparents, other relatives and friends to set aside funds for the express purpose of paying for a child’s future education. The plans provide tax benefits and offer the opportunity for long-term growth. They allow donors to maintain control over the funds until they are needed, and ensure that the money will only be used for higher education-related expenses. The contributor makes decisions concerning prepaying tuition or choosing investment options, and retains ownership of the contract or account until it is used to pay the child’s college expenses.

Cantrell said the upside is that these plans allow parents to save up to $300,000 per child, and, as long as the withdrawals are used to pay for college, they are tax free. The downside? Some come complete with large expenses and fees. Also, depending on the market, if your investment performs poorly, you could lose money. For more information see http://www.collegesavings.org

Another way to save for college is to invest in an educational savings account. Cantrell said the contribution limit on these accounts is small -- $2,000 per year -- and that there are income limitations associated with them. Investors can, however, design their own portfolio -- mutual funds or other investments -- and the money can be used for tuition or expenses.

A Roth IRA also is a way to invest that also allows the contributor the decision of how to invest, but it, too, has income restrictions on the amount that can be saved on an annual basis.

"To fund college with an educational IRA or a Section 529 plan, you get tax benefits," Cantrell said. "So, with a tax benefit it's adding to your dollars."

According to Cantrell, one of the simplest ways for parents to save is through a payroll deduction with U.S. Series E Savings Bonds because the bonds are risk free and the money is directly taken out of your paycheck. The bonds can be stored away in your safety deposit box until it is time to pay for your child's education.

"It is a painless way to save and one that I think really works for a lot of people who may not want to deal with a 529 plan or something like that," she said.

However, the tax break with savings bonds is limited to parents who meet income limits and the bonds must be in the parents' name. For more information go to http://www.savingsbonds.gov

Before deciding on the route to take to save for your child's future education, Cantrell recommends parents first develop a solid financial plan and prioritize their goals so they know what it will take to achieve them.

Summer 2005