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It's
that time of year when college students
across the country reach for their
backpacks and head back to campus while
their parents reach for their checkbooks
and head for the Tylenol. If your
children are still quite young, though,
you can take steps now to reduce the
headaches that may come from those big
college bills.
Just how expensive is it to
send a child through college these days?
It's pretty expensive. In fact, it costs
more than $16,000 for one year at a
four-year public college or university,
according to the College Board. And
college costs have been rising
considerably faster than the general
rate of inflation, so the high costs of
higher education are, in all likelihood,
only going to get higher.
Of course, you may not have
to foot your child's college bills all
by yourself. Scholarships and loans are
available, and many students work
part-time jobs, both during school and
on summer vacations. And yet, you may
need, or want, to help pay for a sizable
percentage of college expenses. To meet
this obligation, you need to save early,
save often - and use the right savings
vehicles.
Fortunately, you've got some attractive
options. Here are some of the most
popular ones:
-
Coverdell Education Savings Account.
Depending on your income level, you
can contribute up to $2,000 annually
to a Coverdell Education Savings
Account (ESA). Your Coverdell
earnings and withdrawals will be
tax-free, provided you use the money
for qualified education expenses.
(Any non-education withdrawals from
a Coverdell ESA may be subject to a
10 percent penalty.) You can place
your contributions to a Coverdell
ESA into virtually any investment
you choose: stocks, bonds,
certificates of deposit, etc.
-
Section 529 savings plan. In this
plan, you put money in specific
investments, managed by an
investment professional.
Contribution limits are quite high,
more than $200,000 per beneficiary
in many state plans, although
special gifting provisions may
apply. And all withdrawals will be
free from federal income taxes, as
long as the money is used for a
qualified college or graduate school
expense of your child or grandchild.
This tax benefit was scheduled to
expire in 2010, but it was made
permanent by one of the provisions
in the Pension Protection Act of
2006. Withdrawals for expenses other
than qualified education
expenditures may be subject to
federal, state and penalty taxes.
(Also, Section 529 distributions
will appear as income on the child's
tax return, which could affect
financial aid calculations.)
Contributions are tax deductible in
certain states for residents who
participate in their own state's
plan.
-
Permanent insurance. If you own some
type of "permanent" insurance
policy, such as whole life or
universal life, you have a chance to
build cash value. Your earnings have
the potential to grow on a
tax-deferred basis, and you can take
policy loans for virtually any
reason you choose - including paying
for college. Keep in mind, though,
that if you don't fully repay the
loan, your policy may lapse, and if
you pass away before repaying the
loan, the total amount owed,
including interest, will be
subtracted from the death benefit.
Before making any of these
moves, please consult with your tax and
financial advisors. But don't wait too
long. Your children may be young now,
but time flies. |
