VOL. 114 | NO. 182 | Monday, September 18, 2000
Top 10 saving strategies for college
Top 10 saving strategies for college
By David K. Morgan
Special to The Daily News
Ben Franklin once said, "If you think education is expensive, try ignorance."
Today, parents everywhere are heeding the great statesman's advice as they educate themselves about saving for their children's tuition expenses. Here are 10 tips on funding a college education offered by the Tennessee Society of Certified Public Accountants.
To meet college fund goals, estimate costs.
The amount to save depends on a number of factors, such as whether a child will attend a private or public school, how fast college costs continue to grow and eligibility for financial aid. Although no one can say what tuition will be in 10 or 20 years, online calculators, such as those found at www.money.com and www.kiplinger.com, can help project future costs based on today's prices.
The earlier saving begins, the better.
If a parent starts saving when a child is an infant, the amount needed to save each month will be far less than waiting until a child is 10 or 12. And with a longer time frame, investments have more time to benefit from compounding.
Regular systematic savings even of small amounts adds up.
Once it is determined much will be needed, parents should determine the amount to save each month to reach the goal. The key to successfully saving for college or achieving other financial goals is to make saving a part of a budget. Each time income goes up, increase the amount contributed to a child's college fund.
Use a child's age and the tolerance for risk to determine the investment strategy.
At least 10 years before a child starts college, CPAs typically recommend keeping most or all of college savings investments in stocks and stock funds. As a child grows older, move money into bonds or cash equivalents such as CDs, money market funds and U.S. Treasury bonds.
It's not always a good idea to save in a child's name.
Under formulas used to determine financial need, parents are expected to contribute 5.6 percent of their assets annually to their child's education, while students are expected to contribute 35 percent.
As a result, funds in a child's name can have a negative impact on the chances of qualifying for financial aid.
Federal tax credits can cut the cost of college.
There are two types of education tax credits. One is the HOPE Scholarship tax credit, which can cut taxes by up to $1,500 a year per student for tuition paid during the first two years of college. The other is the Lifetime Learning Credit, equal to 20 percent of the first $5,000 of qualified tuition and fee payments.
Each credit is subject to an income-based phase out. Both credits cannot be claimed in the same year for the same student, but keep in mind that unlike deductions and adjustments, which are subtracted from income, credits are subtracted directly from the taxes otherwise owed.
The entire cost doesnt have to be saved.
It certainly would be nice to have all the money needed for a childs education -
but it's not always possible. The federal financial aid program includes subsidized loans for students who can prove financial need and unsubsidized loans for other students, as well as grants, and work-study programs in which students are given jobs, usually on campus.
Other borrowing options include home equity loans and loans against retirement savings.
With tax advantages and no income limits, Section 529 plans are the new way to save for college.
These tax-deferred savings plans are similar to IRAs, but the funds in these plans are earmarked for tuition. Although there is not a tax deduction on the investment, the money grows tax-deferred and future withdrawals are taxed at the student's presumably lower tax rate.
Community colleges can help cut the cost of a four-year degree.
More and more students are realizing that they can spend the first two years at a community college, which is typically less expensive, and then transfer to a state college or university to finish their undergraduate studies.
It's not a good idea to forego funding a retirement in favor of saving for college. While financial aid, gifts and current income can help finance a college education, the same resources may not be available for retirement.
And since many colleges don't include money in retirement accounts when calculating the family's expected contribution, saving for retirement may actually help qualify for financial aid.
David K. Morgan is president of the Tennessee Society of Certified Public Accountants and co-managing partner of Lattimore, Black, Morgan and Cain in Brentwood, Tenn.