Are You Ready for College? |
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By: John Rothe Posted: 2007-09-20 10:20:04 |
| As the kids are back in school and summer vacation is over, now is a good time to sit down and review how to pay for the big "C". Yes, college. The cost of sending a student to a 4-year college has been rising at a rate higher than inflation. What does that mean? It means it is time to start saving -now.Currently, the University of Virginia, will cost an out of state student $27,750 in tuition. That number does not include room and board, at $7,435. If that seems to be a large number now, wait until your 1 year old enrolls.According to The College Board's "Trends in College Pricing" tuition has increased an average of 6.5% per year for the last 10 years.At that rate. when you one year old turns 18, tuition could cost over $80,000 per year. Fortunately, there are some options to help you start saving now:529 Plans. Each state has there own 529 plan. Most states will give you a state tax deduction if you use your own state's plan. 529 plans come in two forms-prepaid tuition plans and college savings plans. Prepaid tuition plans allow you to buy future tuition at today's prices. College savings plans, on the other hand, offer tax benefits and a variety of investment options. Earnings grow tax-deferred, and qualified withdrawals are tax-free. Nonqualified withdrawals are subject to income tax, as well as a 10% federal income tax penalty.Coverdell Education Savings Accounts (ESAs, formerly known as Education IRAs). You can contribute $2,000 annually to an ESA, and funds may be used to pay for elementary and secondary education, in addition to college expenses. One major advantage of Coverdell ESAs is that if the funds are used to pay for qualified education expenses (e.g., room and board), earnings will not be taxed. Certain income limits may apply.Series EE Savings Bonds. These types of savings bonds usually can be purchased and/or redeemed at your local bank. They are issued in denominations that are half of the bond's face value ranging from $50 to $10,000. For example, a $50 bond would cost $25. Depending on your income tax bracket, EE savings bonds may offer state and local tax-deductible interest. When used for qualified education expenses, interest may be free of state and federal taxes, as well. However, they are generally subject to federal income tax and early redemption penalties may apply if the bond is redeemed in the first five years. Another possible advantage to savings bonds is that they may be purchased by anyone for your child, for any occasion.Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA). UGMA and UTMA accounts are custodial accounts. You may make unlimited contributions to such accounts, and the funds may be used for whatever purchases you deem appropriate. The UGMA account is particularly useful if you are considering purchasing stocks or mutual funds for your child to help save for education. More specifically, UGMA typically authorizes the transfers of cash, bank accounts, stocks, and mutual funds to minors without the need for an attorney; an UTMA account authorizes expanded transfers, including real estate, and royalties. For both UGMA and UTMA accounts, a portion of the earnings may be tax free or taxed at the child's rate, generally a lower figure. You may make unlimited contributions to such accounts, and the funds may be used for whatever purchases you deem appropriate.If you plan wisely, when your precious one year old enters college, you will be emotional for the right reasons.John Rothe is President of the Rothe Financial Group, based in McLean, VA. For more information visit http://www.therothefinancialgroup.com |
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