July 2, 2007
Save early – college could cost $300,000 in 18 years!
Here’s an article from Cincinati’s The Enquirer that made my jaw drop!
Saving for college starts early
Experts advise parents to begin now, look at tax-free plans
With college costs increasing at about double the rate of inflation, or about six percent per year, parents who want to help foot the bill for their children must start saving while the kids are young to put aside a significant sum by the time they graduate, said Jarett Levitsky, a portfolio manager with Johnson Investment Counsel in Monfort Heights.
Savingforcollege.com, a Web site devoted to compiling and analyzing information about investing for college, estimates that the parents of a one-year-old child today will need to save more than $600 per month until high school graduation to have the recommended $300,000 a child would need for college in 18 years.
While that amount may seem staggering to many young parents trying to pay mortgages and other bills, Lisa Ciccia, vice president and branch manager of the Cincinnati office of Fidelity Investments, said parents who start saving even small amounts are better off than those who do nothing.
“With college, the most important factor is time,” she said. “The sooner you can start saving, the better.” Ciccia said that most college savings plans can be started with small initial investments, and parents can make monthly contributions that are comfortable for them financially.
There are many savings options available for college investments, but Levitsky said one of the best is the 529 savings plan, which allows contributors to put aside money tax-free.
Donors can deduct up to $2,000 per beneficiary per year from their state income tax. Contribution limits for the accounts are much higher, but $2,000 per child is the maximum tax deduction, said Levitsky.
In addition, the investment grows tax-free and the Pension Protection Act allows the withdrawals to be made tax-free when the money is needed for tuition.
Levitsky said another benefit to the plans is that unused money can be shifted to other children in the same family or used by the parents to fund their own education expenses.
“These plans are tremendously attractive for Ohio residents,” Levitsky said. “You get a tax break on your income tax, and the plan grows tax-free. Ohio is one of the few states that offer this.”
Ohio’s CollegeAdvantage 529 Savings Plan is listed on savingforcollege.com as a five-cap plan, the site’s highest rating, because of its tax advantages for Ohio residents.
Meanwhile, Kentucky’s 529 Education Savings Trust Plan gets 4.5 caps from savingforcollege.com, while it earns only 3.5 caps for non-residents.
Another advantage of 529 plans over savings vehicles such as custodial accounts is that parents maintain control of the money and can withdraw it in an emergency for other uses, although there is a 10 percent penalty, said Joe Hurley, founder of savingforcollege.com.
Another option for college savers is the Coverdell Education Savings Account, Levitsky said. Like the 529 plans, Coverdell accounts also grow tax-free and qualified withdrawals are tax-free, but these plans can be used to pay for private elementary or high school tuition as well as college, so parents can set aside money for pre-college education also. Any leftover money can be used toward college expenses once a student has graduated from high school, Levitsky said.
“There is no state tax break, but this option is a win-win for families who choose to send their children to a private high school where tuitions are quickly rising to the levels of some colleges and universities,” he said. “The one drawback, however, is a relatively low maximum contribution of $2,000 per year per child, and they are not as flexible as the 529 plan.”
Fidelity’s Ciccia said that her company has come up with at least one unique way to help parents save for college: a credit card that pays a portion of each purchase into an account for your child.
The Fidelity College Rewards card pays 1.5 percent of each purchase into a savings account for college, Ciccia said.
Many parents who holds Fidelity accounts not only use the credit card themselves, she said, but also encourage relatives such as grandparents to sign up for them. That way they can help with college savings just by making purchases on their credit card.
There are other spend-to-save programs, such as Upromise, that families can use to set aside money to 529 accounts. The amounts paid into the account range from 1 to 10 percent.
Local companies with ties to Upromise’s MasterCard, issued by Citi, include Procter & Gamble, Kroger and Chiquita.
Some consumer experts don’t like such cards, worrying that Americans don’t need more inducements to spend.
“If it’s enticement to run up higher credit card debt, that’s a confusing saving incentive, to say the least,” said Travis Plunkett, legislative director of the nonprofit Consumer Federation of America advocacy group in Washington.
MANY PARENTS REGRET WAITING
Ciccia and Levitsky cautioned that it is never too late to start a savings plan for your child.
A poll of 500 parents who had children in college during the last 10 years conducted in May by Synovate for the John Hancock Financial Services showed that more than half wished they had started saving earlier for their children’s college educations, and more than 60 percent said they realized too late there were many options for setting aside money.
The poll, which had a margin of error of plus or minus 4.3 percentage points, also indicated that these same parents were going to be paying off college loans for years to come.