Today's Officer - Winter 2007 - (Page 22) Even the slightest advanced planning can go a long way toward making the college experience less challenging and less stressful for parents. Consider these basic building blocks in formulating your college funding attack plan. DECIDE ON A FUNDING COMMITMENT EARLY Ask parents how much they are willing to pay for their child’s college education, and many probably will say, “Whatever it takes” or “I want them to be able to go wherever they get in.” While these sentiments are grand, it makes planning a bit difficult. Instead, consider making a decision early about how much you are willing to save toward college costs. If you are married, this should be a decision you and your spouse make together. lege is even more daunting, costing an estimated $305,000. It’s almost enough to make you give up before you get started! Fortunately, saving small amounts early on can go a long way. For instance, assuming a 7-percent annual return and 5-percent annual college inflation, saving $250 a month from birth will cover four years of public college. Waiting until a child is 7 years old to start saving increases the monthly amount to $346 a month, while waiting until the child is 14 years old to start requires a daunting $602 a month. Making an initial $10,000 deposit reduces the preceding monthly deposits to $174 at birth, $254 at age 7, and $463 at age 14. (Note: The monthly amounts noted above would need to be deposited each month through the end of college.) Strongly resist the temptation to ignore or underfund retirement savings to pay for college. Remember, there are plenty of ways to pay for college. For instance, you could commit to funding four years of the average national in-state tuition for public colleges and universities, which currently is approximately $12,800 annually, with the child paying everything above that amount. This gives you a clear target to aim for — and one that easily is communicated to your child. Alternatively, you could commit to a certain annual or total dollar amount such as $20,000 per year or a total of $80,000 for higher education costs per child. Again, this provides solid numbers you can plug into an online education calculator to determine how much you need to save to reach your goal. One increasingly prevalent school of thought, and one this author agrees with, holds that children should be responsible for bearing some portion of college costs through part-time work, loans, scholarships, or other methods. If children don’t have any “sweat equity” invested in the process, their commitment to study and work hard might not be what it should, and tens of thousands of dollars could go to waste. This commitment could take the form of the child being responsible for 25 percent to 50 percent of all college costs or the parents covering three years while the child covers the fourth year. Strongly resist the temptation to ignore or underfund retirement savings to pay for college. Remember, there are plenty of ways to pay for college, but there is no scholarship for old age! If you wait until higher education expenses are out of the way before getting serious about retirement savings — which many well-meaning parents end up doing — you seriously might jeopardize a secure retirement. STA RT SAV I N G EAR LY According to the College Board, the average cost for a child born in 2004 to attend a four-year public college is a whopping $128,000 (in future dollars). Funding four years of private col22 TODAY’S OFFICER Winter 2007/08 Thinking Ivy League? The numbers start to get a bit scary. If your prodigy is currently 5 years old and you have $5,000 saved for college, you will need to deposit $1,060 a month through the end of college to cover four years at Harvard University (assuming 7-percent annual returns and 5-percent annual college inflation). Delaying the savings plan until the child is 10 years old requires $1,432 a month. One cost-effective avenue that should not be overlooked is a community college system. Completing two years of community college and then transferring to a four-year, in-state college can save tens of thousands of dollars in tuition and room and board. A significant number of states have special preference programs for in-state community college transfer students that make getting into a top-rated state school much easier. EX P LORE AVAILABLE TOOLS There are a myriad of tools to help parents save for college, including pre-paid college tuition plans, Section 529 collegesavings plans, Coverdell education savings accounts (ESAs), custodial Uniform Gifts to Minors Act or Uniform Transfers to Minors Act accounts, taxable investment accounts, and EE savings bonds. While each has its pros and cons, the Section 529 college-savings plan has risen to the top as the preferred savings vehicle for many families and therefore deserves a closer look. Section 529 plans are state-sponsored plans that combine tax-deferred savings with flexible investment options and high contribution limits. The parent typically owns the plan with the child as the beneficiary. Section 529 plans have a contribution limit of $12,000 per donor per child annually ($24,000 per child for married couples), and the total plan contribution limit is more than $250,000 for most plans.
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