Savings for College [UPDATED]
October 25, 2007
The College Board reported on Oct. 22 that tuition at public and private colleges for the 2007-08 academic year continued to outpace inflation. Parents face on an uphill battle in saving enough money to cover college tuition for their children.Four-year public colleges have taken the hardest hit, with the rate of growth in tuition and fees this decade the highest it has been in 30 years. The average tuition and fees at four-year public colleges for the 2007-08 academic year are $6,185, up $381 (or 6.6%) from last year, the College Board said. Those numbers don't include room and board and other expenses, which add about $7,404 to the bill. The consumer price index for all urban consumers rose 2.8% between September, 2006, and September, 2007. Costs at private universities saw similar increases to those at four-year public schools. Tuition and fees for this school year averaged $23,712, a $1,404 (or 6.3%) increase over last year. University officials cited rising utility rates, health care, and workers' compensation costs among the reasons for the hikes.
- Business Week Report October 2007
529 Plans - A 529 plan, named after Section 529 of the Internal Revenue Code, is a savings plan designed to encourage saving for future college costs with tax advantages which vary from state to state. 529 plans, legally known as “qualified tuition plans,” are sponsored by either states, state agencies, or educational institutions. Currently there are two types of 529 plans: (1) pre-paid tuition plans and (2) college savings plans. A detailed state-by-state comparision of 529 plans can be found at savingforcollege.com.
Custodial Accounts - These type accounts (either UGMA or UTMA) can be set up at a bank or brokerage firm and will give the designated custodian full discretion over investment decisions. Custodial accounts have no restrictions on deposits, no restrictions on how the funds are used as long as it is for the child's benefit and no penalties for early withdrawal of funds. The disadvantages of a custodial account is that they are taxed annually as well as at withdrawal. In addition at age 21 the child has complete control over the account and funds. The custodial accounts are best used by parents/custodians who are confident that their portfolio management can outweight the tax consequences of custodial accounts. These type of accounts are also beneficial to parents who need to pay for secondary school through a savings plan. Custodial accounts set up at banks typically invest in a CD or money market. A CD would make sense for parents who are using the savings program exclusively for college, while a money market makes more sense for parents who may need to tap into the account for secondary school costs.
Coverdell Education Savings Account - The Education IRA has been renamed to the Coverdell Education Savings Account. The Coverdell ESA was created to give individuals a way to save for a child's elementary/secondary school education as well as for college, graduate school, or vocational school in the same investment vehicle. The account must be established for the benefit of a child under the age of 18 with all contributions made before the beneficiary's 18th birthday. An individual can contribute up to $2,000 annually to a child's Coverdell ESA if their modified adjusted gross income is less than $95,000 as a single tax filer, or $190,000 to $220,000 as a married couple filing jointly in the tax year in which they contribute. All earnings in the account will accumulate tax-deferred and can be withdrawn tax-free if used to pay for any qualified education expenses.
other college savings options include:
College Savings Bank - This bank offers a unique CD which indexes the interest rate paid on the CD directly to the year-to-year increase in college tuition. This is a fantastic hedge against inflation (and tuition costs) outpacing stock market returns or other returns generated in a 529 plan.
Affinity Bank - Offers a 10% rate on kids savings accounts up to $500. While this $500 cap may not go far enough as a college saving program this is an excellent way to sock some extra money away for college while teaching your kids about savings. Imagine the fun when they realize the are earning twice the rate that Mom and Dad are earning.
HSBC Bank - Offers a 5.05% savings rate on joint accounts opened with both an adult and child's name. This may be an appropriate investment for parents who wish to park funds temporarily or maintain some discretionary control of the funds through college.
Zions Bank - Parents or grandparents can sign up their child for the Zions Bank Kidsgreen Savings Account which features no minimum deposit or monthly fees, new account kit with kids activity book explaining the fundamentals of banking, and a free session with a savings account specialist
Independent 529 plans offer parents the chance to pay for college in the future at today's price which can lead to large discounts on future costs. The program co-sponsored between Independent 529 plan and TIAA-CREF allows allows you to prepay tuition today that your child can use later at any participating college. This program protects against increases in tuition and has no initial fees, no maintenance fees, and no annual fees��and is free from federal taxes. If one assumes that private college tuition inflation continues at an average rate of 5% per year and an Independent 529 Plan annual discount rate of 1%, then this is the equivalent of earning a 6% increase on those savings funds each year tax-free
State Farm Bank offers Fixed Rate CDs, Market Rate CDs, and mutual funds via State Farm Insurance which can be purchased in a Coverdell Education Savings Account.
Financial Aid is a vehicle that many parents use to pay for college costs. The site finaid.org is a comprehensive student financial aid site which may answer many of the questions parents may have regarding paying college tuition.