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. Tuition costs continue to increase at an exponential rate although growth has slowed over more recent time. According to Collegeboard.com , the current annual public college tuition + Room & Board is nearly $20,000 per student. That's a 10% growth from 2010-2011.
What also should be kept in mind is that many professions require a graduate degree. For many families, it's hard to cover education expenses from their current incomes. This highlights the need to not only save often and early, to get compounded growth, but to also select the right school for your children. This is why we develop a plan early to show our clients what to expect and how to plan for it. We also have developed partnerships with local specialists to help guide familes through choosing the proper colleges and helping them apply for grants, scholarships, and additional funding to help cover costs.
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.
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).