Saving for College- January 20, 2008

Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
January 20, 2008

Saving for College
January 20, 2008

There’s no doubt that paying for your child’s college education is a scary proposition for most people.  The average costs of tuition and fees for one year exceed $23,700 for private colleges and $6,100 for public colleges.  This is before you pay the costs of room and board, books and all the miscellaneous expenses which could easily add up to an additional $10,000 or more per year.  For example, if you have a 4-year old who you expect to attend college with current annual total costs of $25,000, you’ll need to accumulate approximately $250,000 in order to cover the estimated costs for four years.  When should you start saving?  If you start now, you’ll need to save approximately $800 per month in my example.  Every year you wait, the costs go up.  Your best defense is a good offense.  Here are your play options: 

529 Plans.  My favorite choice for most families is the 529 Plan because it allows you to invest a lot of money and your money grows based on traditional investing strategies.  Here’s how it works:

• You can contribute up to $60,000 ($120,000 for married couples) during any 5-year period.
• While your contributions are not deductible, your earnings grow tax deferred and withdrawals, when used for qualified education expenses, are tax free.
• You control the money.  In fact, if you don’t need the funds for your child’s education, you can withdraw the money.  You’ll pay income taxes on any profits plus a 10% federal penalty. 

Our research for our own clients suggests that the State of Utah plan is among the top rated 529 plans in the country. 

Prepaid Tuition Plans.  Pre-Paid Tuition Plans are offered by a number of states (including Alabama) and allow you to pre-pay college expenses for basic in-state tuition and fees.  Your contributions can be made lump sum, over a period of years (5-years, for example) or until your child attains age 18.  If your child goes to a college out of state, most plans offer transfer tuition funding based on the average cost of tuition and fees in your state of residence.  Some people mistakenly believe that the state guarantees your contributions will fully fund in-state tuition and fees.  They do not but I know of no cases where the state has not fully covered tuition and fees.

UTMA and UGMA.  I still find some people setting up Uniform Transfer (Gift) to Minors Account’s for children as a college funding strategy.  This is the least effective strategy since earnings are taxed at the parent’s income tax rate above a minimal threshold and the child receives legal control of the account at his or her age of majority (age 19 in many states). 

Most people think of funding college as a huge expense when in truth, it’s a wonderful investment in your child’s future.  Research from the US Census Bureau indicates that college graduates, ages 25-34, earn 77% to 86% more than those only graduating from high school or who obtained their General Education Development (GED) certificate.  This added income could easily mean more than an additional $1 million dollars for your child over his or her career.

To help you study your many options, visit the Resource Center at www.welchgroup.com and look at the links labeled ‘College Funding’.

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