VOL. 110 | NO. 99 | Monday, May 20, 1996
05-20 Inv analys
Saving for your childs education
By Mike Stein
Special to The Daily News
For years, one of the basic American dreams has been to have the financial ability to send a child to college but this dream is becoming increasingly more difficult to realize as college expenses mount at annual rates that exceed inflation.
Making the dream even more difficult to attain is the shrinking number of financing options available to parents: college education loans are more difficult to get, interest rates on student loans are rising and subsidies are declining. In addition, in todays economy, many families have limited funds to divert to a college savings plan.
Financial advisers agree that the key first step to take in reaching your goal of financing a college education is to create a college funding plan. This is necessary in order to bring the funding process into focus by providing a clear picture of your current financial situation, while helping you to establish future goals.
In addition, a solid education funding plan will help you to begin saving immediately and getting any early start is perhaps the most important element in any successful plan. Financial advisers stress the value of early saving and assert that every dollar invested today earns money for you, while every dollar borrowed later costs money.
As an example, if your were born today, youll need to put away more than $260 per month growing at least 8 percent annually to raise the more than $125,000 you may need by the time he or she enters college.
On the other hand, if you put off saving until your child enters high school, youll have to save more than $2,200 per month to reach the same goal. As anyone can see, a delay in this kind of planning means that you will lose the benefits of compounding returns. In addition, you may have to borrow in order to finance education costs and pay interest on the amount borrowed.
By extending your investment horizon, youll be able to invest more safely in higher return investments, such as common stock or stock mutual funds. These investments provide the greatest opportunity to keep pace with rising college costs.
Other possible investment options include mutual funds, municipal and corporate bonds, U.S. Treasury securities and zero-coupon bonds.
One of the most popular of these is zero-coupon bonds or simply zeros, which do not pay interest during the life of the bond, but pay principal plus interest at maturity. Zeros are sold at much less than their face value, and the return on investment is derived from the difference between the original issue and the price increase as the maturity date approaches. If you decide to use zeros to finance your childs education, you may want to purchase bonds that come due in the years when your child will be in school.
However you invest for your childs education, you may want to consider opening a custodial account in your childs name, into which you can transfer these growing assets. Your child will not be taxed on the first $600 of net unearned income during the year, and the second $600 will be taxed at the childs rate. Any income in excess of $1,200 will be taxed at the greater of the childs or parents rate. Youll need to determine the expected amount of net unearned income, your tax rate and that of your childs to ascertain whether this is an appropriate strategy.
Uniform Gifts to Minor Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts are simple to set up and administer. Almost any bank, mutual fund company or brokerage house can do so. The key difference between a UGMA and a UTMA is the type of property an adult can transfer to a child. UTMA allows any kind of property real estate, personal property, securities and cash to be given as a custodial gift, whereas UGMA restricts custodial gifts to bank deposits, securities and insurance policies.
No matter which investment option or custodial account you choose, your financial advisor will be happy to work with you to ensure that your dream of a college education for your child has every opportunity to become a reality.
Stein is first vice president of investments for Prudential Securities Inc.