Saving for College
It is amazing how fast time flies. It seems like only yesterday you brought your son or daughter home from the hospital for the first time. You can remember your child taking his or her first steps, negotiating adolescence and receiving a driver’s license. Now they are preparing for their future and thinking about what college they want to attend. As a father, saving for college does not have to be intimidating or pose such a financial burden on you and your family. As with many things in life, proper planning and preparation can help make the path to higher education much smoother.
Analysts predict that the cost of attending college will rise approximately 6 percent every year (The College Board, 2006). With such staggering growth potential, it may not be unlikely to pay upwards of $200,000 for your child’s college education. Often times, loans are not a feasible option, especially as you are nearing retirement. Keep in mind that it is cheaper to save for your child’s college education now than rely on loans later. Saving now allows you collect interest on your money and avoid loans that charge you interest. With the cost of higher education rising every year, it is important to start planning for how you are going to pay for your child’s college education now.
There are several ways that you can start saving for college:
- Section 529
- Coverdell Education Savings accounts
- Traditional Savings Accounts
- Taxable Investment Accounts
- U.S. Savings Bonds
- Uniform Transfer to Minors Act (UTMA)
While you may be familiar with many of these saving plans, Section 529 and Coverdell Education Savings Accounts may be new to you.
Section 529 are state-sponsored college savings plans that offer federal tax breaks. There are two types of plans under Section 529: prepaid tuition plan and college savings plan. The prepaid tuition plan allows you to lock in today’s tuition rates for when your child attends college in the future, but often does not cover room and board. The college savings plan allows you to save money for your child to attend any college and may be used to cover education-related expenses such as room and board. Section 529 plans offer tax breaks and allow you to retain control over the account. There are many rules and requirements that govern each state’s Section 529 plans; therefore, it is a good idea to contact a financial advisor to determine if this is the best plan for you.
Coverdell Education Savings Accounts (formerly called Educational IRAs) are accounts you can establish for your child’s (beneficiary) educational expenses. Distributions are tax free as long as they are used for educational expenses. Educational expenses include the cost of k-12 private education. Contributions to a Coverdell account may not exceed $2,000 for any one year and grow tax-free until it is distributed. A financial advisor should be able to help you better understand this federal savings account.
For more information about the various savings programs you have available to you, it is important to consult a financial, legal or tax advisor. Each of these savings programs are governed by different laws and some vary from a state to state. An experienced financial advisor from your state should be able to help you understand and develop a plan that will best meet your needs. The government also offers several tax benefits for education. You can access information about these benefits at http://www.irs.gov/pub/irs-pdf/p970.pdf.
Often, when we decide to think about things later, it becomes too late to do anything. Do not let that happen to you. As a dad, it is important to take some time to determine the best way that you can start saving for your child’s college education. Laws and tax issues surrounding educational savings plans can be complex. Therefore, it is always best to seek the advice of a taxation attorney or financial advisor.