Our Archive of Articles About Financial Literacy and Other Topics
Getting a Jump On Your Kids' College Tuition
May 12, 2008, 3:18 pm
Tips for parents with kids planning to attend college someday.
For new parents, the projections of what a college education will cost ten to fifteen years from now can be chilling. For those parents who can afford to put a little something away every month, getting a head start on those bills is a good idea. After all, most pathways to success start on the campuses of our colleges and universities, and everyone wants their children to be successful.
The keys to putting a college savings program together is to plan as effectively as possible, and get started as early as you can.
For starters, you need to determine how much you can budget every month toward these savings. Remember, however, that it’s important to save money for a lot of future needs, including your retirement. So don’t put all your eggs in this one basket.
This is where a reputable investment adviser comes in handy. Once you’ve determined how much you can spend, and what your goals are, sit down with someone who can work out an effective investment strategy to meet your goals. They will likely advise you to invest aggressively for college tuition costs, especially if you start soon after the child is born.
Having a full 18 years to save up for these costs is a huge advantage for several reasons. First, it allows you to invest a smaller monthly amount, which means you won’t feel the pinch as much. Second, it increases the cumulative effect of compounding interest, or the expanding growth rate of your earnings.
Another important point is to keep these investments separate from your other savings and investments. If you simply pool this money into a savings account, or even a mutual fund that has no clear objective, it becomes that much easier to justify using the money for other needs. In fact, it would be wise to set up separate accounts for each child if you have more than one.
One of the newest vehicles for college tuition savings is the tuition prepayment program. If you haven’t seen them yet, they are likely to become the wave of the future. While there are several key advantages to a tuition prepayment program, you should remember a few key points.
These programs will differ from one institution to the next, so you should check out the details with the university before participating. Essentially, though, the advantage is that you lock in today’s pre-inflation tuition costs for your child, even if he or she will not attend for 18 years. When your child reaches college age, most of the tuition costs are paid.
The potential drawbacks – again, depending on the school – is that you are usually locked into that particular university or university system, although some programs make allowances for using the money with another school. Another drawback is that, if your child decides not to attend college, all you get back is the amount of money you put into it, and they keep the interest.
Finally, as the tax code is currently written, you run the risk of accumulating a tax liability when the tuition is used. If the actual cost of tuition at the time of use is higher than the projected cost based on inflation rates when you joined the program, the difference between the two might be considered earned income, on which you would have to pay taxes.
In the long run, however, any of these strategies is far better than doing nothing. By planning ahead, you can avoid a huge tuition bill down the road while making sure your child gets the education he or she will need.
About Springboard Nonprofit Consumer Credit Management
Springboard is a nonprofit credit education and financial counseling organization founded in 1974. The agency offers personal financial education and assistance with money, credit and debt management through confidential counseling. Springboard is accredited by the Council on Accreditation, signifying high standards for agency governance, fiscal integrity, counselor certification and service delivery policies. The agency provides pre-bankruptcy counseling and debtor education as mandated by the bankruptcy reform law. Springboard is a HUD approved housing counseling agency and a member of the National Foundation for Credit Counseling, a national organization of nonprofit credit counseling agencies. The agency has several locations in California and offers face-to-face and nationwide phone counseling services. For more information on Springboard, call 1-800 WISE PLAN (1-800-947-3752) ext. 7750 or visit their web site at www.credit.org.
