Ways to save for their college -- NOW!
With the cost of higher education rising faster than inflation, parents of today's future grads are faced with a tough assignment in saving for college.
Though few would question the value of a college education, the majority of families are unsure how much - and how - to save. A frightening example, says certified financial planner Lyn Boening, is that a parent of this year's newborns would have to save (at least) $800 per month for 18 years to have any hope of sending Junior to an Ivy League school.
While the numbers are enough to scare off anyone, doing something -- and soon -- is better than nothing at all.
While a half dozen college savings options are available, differences in plans such as the state's 529, savings bonds and other programs or the matter in which contributions are taxed, who can receive them and for what purpose they may be used.
"The main thing is that there is no one size fits all," Boening says.
"Everybody's family situation is different. If you're able to work with a trustworthy, knowledgeable, financial planner; they're going to be able to help you determine which works best for you."
Perhaps most popular, the state's 529 plan allows up to $11,000 per year to be contributed for any named beneficiary. "It's great if you're poor as a church mouse and can only put $25 a month in savings," says Boening. "Or if you're very wealthy and want to move money out of your estate, so to speak, to avoid paying a ton of estate tax."
Advantages to a 529 are that the "donor" of an account maintains ownership until gifting the money and, unlike earlier versions of the 529, contributions can be used for any accredited school, including those out-of-state.
A possible downside, while colleges in years past did not include 529 assets in determining financial aid, a handful of schools are beginning to look at 529 funds and "may give aid to a student who does not have a 529 [fund] over one who does," says Boening.
Another means of savings, the Unified Gift to Minors Act (UGMA), is not restricted for educational purposes. Contributions to an UGMA come from pre-taxed income. UGMA earnings, when used for educational purposes, are not subject to further tax.
A possible downside, when UGMA beneficiaries turn 21, unrestricted account ownership is granted. In others words, the recipient could buy a sports car.
"A UGMA might be good for a grandparent who says, 'it's up to the parents to send them to college. I just want to tuck some money aside for them later,'" Boening says.
Traditional savings bonds offer an inexpensive means of setting aside funds for college. Issued after 1989, savings bonds cashed for school purposes are not assessed state or federal taxes.
An upside to savings bonds is predictability, however, a downfall is that bonds are not known to appreciate as aggressively as other savings methods and earnings are not tax-free.
Finally, the time-tested Coverdell account allows up to $2,000 (of pre-taxed income) to be contributed annually.
"If you've got five kids and you contribute $2,000 a year from birth into a Coverdell, you're pretty well set," says Maura Murphy, financial planner for Ashland Financial Solutions.
A big advantage of Coverdell savings is that monies contributed can be used (tax-free) for other education expenses such as private elementary education, tutoring, special needs instruction, books, supplies, room and board, uniforms and other costs.
For any method of saving, families who are unable to consult a financial advisor can still invest for college. For savings bonds and the Coverdell, set up an account at a local bank. For a 529, visit online at www.oregoncollegesavings.com for more information.
A final word of advice, when setting up any type of account, consider the beneficiary's age and time before needing funds for college. For older students in which parents have not yet begun to save, opt for safer options, such as bonds. Those saving for younger students can afford to direct savings towards more aggressive investments initially.
"You want to get more conservative as you get closer to sending them to college," Murphy says. "But the most important thing is to just start saving, no matter which way you do it."