 | | | What should I do if I need to save
for college? | | Saving up for a child's education is
a daunting prospect for any parent. With college tuition continuing to rise faster
than the rate of inflation, it's critical that parents start planning their
savings strategy years in advance. Fortunately, the government has created a number
of tax-deferred options for college saving. They may not get you every single
dollar you'll need to pay the way for your college-bound youngsters, but
they can certainly give you a strong head start. | |
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One easy tool for savings is the Coverdell Education Savings Account. In the past, these accounts were plagued by a low annual contribution limit of $500. The 2001 tax code changes have made the Coverdell a much more attractive option, however, raising the annual limit to $2,000 per child. Contributions to these accounts are not deductible, but the amounts deposited can grow tax free until distributed. Those distributions aren't taxed as long as the beneficiary uses the money for qualified educational expenses. An added advantage is that you can use a Coverdell account for higher education, as well as elementary and secondary education expenses.
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A still more generous alternative are so-called Section 529 plans. These plans are sponsored by states, state agencies, or educational institutions. Most states have total contribution limits of $300,000 and up (and most states will raise their limits each year to keep up with rising college costs). They aren't the magic bullet, though. Some have high expenses and may lack good investment options. But they do allow for generous pre-tax contributions and are easy to setup. There also are 529 prepaid-tuition programs that lock you in today's tuition rates. These plans, though, tend to be fairly inflexible in terms of college choices. Morningstar.com has comprehensive performance and investment information on most 529 plans.
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| Another savings option for college is US savings bonds. These options offer some inflation protection, but little else. Some do offer, though, limited tax protection. Another option is a standard broker account. This option gives you complete control over the investment decisions. If you are not a frequent trader, the fees associated with a brokerage account can be less than a 529. A brokerage account, though, offers no tax protection.
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You also can take out a home equity loan to pay for college. The upside is that the interest on a home equity loan is tax deductible. The downside is that you are saddling yourself with a loan. In addition, if you go to sell your house and the value has gone down, you might owe more on the house than it is worth.
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Of course, like any investment goal, you have to first build the discipline to put aside the necessary savings on a regular basis. Don't neglect your own retirement: some investment advisors recommend that you create separate "buckets," directing some money each month to your own and your child's accounts. And remember that your kid can pull his or her own weight, too. Financial scholarships and grants are available for all kinds of achievers, and industrious teenagers can earn money for themselves, both while in high school and college.
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