Dealing with the Cost of Sending Your Child to College

by on December 15, 2010

College Costs — Have a Plan in Place


Grateful acknowledgment is made to Stephanie Brown & the folk at Prospect Mortgage for this article.

With the cost of college doubling every 12 to18 years, it’s imperative that parents develop a college savings strategy. Having even a modest plan in place can produce dramatic results: Investing just $100 a month for 18 years will yield $48,000, assuming an 8% average annual return. Here are three common college savings plans:

  • 529 Savings Plan

Contributions are nondeductible. Earnings and withdrawals are tax-free if used on qualified education expenses. Most plans let you save in excess of $200,000 per beneficiary. There are no income limitations or age restrictions, and you can change the beneficiary to another family member, including yourself.

  • Coverdell Education Savings Account (ESA)

Formerly the Education IRA, ESA contributions are nondeductible and limited to $2,000 per beneficiary per year. Earnings and withdrawals are tax-free if used by the beneficiary before age 30 on qualified education expenses. Eligibility is constrained by Modified Adjusted Gross Income (MAGI): $190,000 or less for couples or $95,000 or less for singles.

  • Prepaid Tuition Programs

Prepaid tuition programs allow parents to lock in a tuition rate and begin paying the cost of college today. Many states have their own programs but might limit usage to state institutions only. Alternatively, there’s a 529 version that can be used at any accredited degree-granting school, whether it is private, public, undergraduate or graduate, regardless of location.

Whichever college savings strategy you choose, look for low-cost plans with an age-based portfolio that gradually shifts the asset allocation from stocks to bonds and cash as your child ages.

The above content is for informational purposes only and should not be used as a substitute for consultation with a financial advisor before making investment decisions.

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