Strategies To Keep Pace With Rising Costs
Invest early. Invest often. Invest for growth.
These are the basic principles of saving for your child's college education. College tuition costs keep increasing on a yearly basis with no apparent end in sight, although the percentage of the increases has slowed in recent years. While 10% annual increases were common in the 1980s and early 1990s, The College Board projects smaller yearly increases, as we head further into the twenty-first century. Over the 2000-2011 school-years decade, published tuition and fees at public four-year colleges and universities increased at an average of 5.6% per year beyond the rate of general inflation. However, with the average cost at private colleges exceeding $25,000 per year ($35,000 if you factor in room and board) , the projected four-year cost at a private college for today's newborn can be outstanding.
(Source: "Trends in College Pricing 2010: Highlights". www.CollegeBoard.com)
With many professions requiring graduate degrees, it quickly becomes apparent that very few families may be able to cover education expenses from their current incomes. For families with three or more children, college and graduate school costs could reach, or easily exceed, $500,000.
College Funding Options
529 College Savings Plans
Available from each state, these vehicles provide tax-free growth of capital when used for qualified educational expenses. The contributor owns the account and therefore retains control over the money. Also, if the beneficiary does not attend higher education, it may be transferred to another family member.
Pre-paid Tuition Plans
Allow participants to "lock-in" tuition rates at available state colleges or universities. These plans are attractive in certain situations but do not provide the possible inflation adjusted returns as invested money.
Coverdell Education Savings Accounts (ESA)
Like 529 plans, ESA earnings will not be taxed when used for qualified college expenses but may also be used for primary and secondary education.
Gifts to Minor Children
Some parents and grandparents choose to place assets in a minor's name under the care of a custodian or trust to take advantage of the annual exclusion in which $11,000 per year may be transferred without being subject to gift tax. All states have adopted either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA) that allow the custodian to hold property for the minor until they reach the age of maturity. These accounts do have disadvantages, including loss of parental control and limited tax savings.
Education Credits
Families meeting income requirements may qualify for a $1,500 tax credit for the first two years of undergraduate expenses, otherwise known as the Hope Scholarship Credit. Also with the income limitation, the Lifetime Learning Credit may cover 20% of the first $10,000 of expenses. If a student qualifies for both credits in the same year, you may claim either credit, but not both.
College Tuition Deduction
A current income tax deduction may be utilized for up to $4,000 per tax year. Certain limitations apply ,including an income maximum of $80,000 (or $160,000 if filing jointly).
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