Saving for your child's education

By the time your newborn baby is ready for college in 2024, the cost of four years at a private university may exceed $365,000, and the cost of four years at a public university may soar to $150,000, education experts say.

The moment you hold your child, you may also want to begin preparing for future education costs. Most experts agree that the earlier you begin saving, the better, since saving for college takes many years of planning and preparation.

"The rule of thumb is to start early, stick to the plan and stay focused," says Paul D. Jones, CEO and president of JMG Management, a financial group based in Minneapolis. "If you start saving when your child is born, the money will grow as he or she grows."

It is difficult for many parents to save adequately for their children's educations. Jones advises parents to treat saving for future college education costs as a networking and investment opportunity for the entire family. Parents may consider asking relatives to make a contribution to an education savings plan in lieu of gifts. Another novel idea is to make a weekly contribution to a college savings plan that matches a child's weekly allowance.

As challenging as it may appear to meet rising college costs, many attractive college savings programs are available for all kinds of budgets. Saving just $10 a week or $100 a month can go a long way and allows you to take advantage of compounded interest.

Among the most common education savings programs are the Section 529 plans that allow tax-free withdrawal of funds for certain education expenses, including tuition, fees, room and board, books, supplies and equipment. There are also no income limits to participate in the program.

For example, Schwab's College Savings Plan or the Learning Quest 529 Education Savings Program each offer an easy way to start saving for your child's education with automatic investments as low as $50 per month. The funds grow tax-deferred, with tax-free withdrawals for qualified education expenses. Lifetime contribution to the fund is $235,000 per student.

In general, Section 529 plans allow parents flexibility to change beneficiaries if needed, which can come in handy to move an account from child to child, or even to other relatives simply by changing the name on the account. It's a great feature if a child decides not to go to college. If you choose, instead, to name yourself as a beneficiary and use the funds for purposes other than education expenses, you will be assessed a 10 percent penalty under the federal tax law.

There are a few things to consider about Section 529 plans. Many plans also have financial service fees associated with them, so it's always wise to consult a financial advisor to determine which Section 529 plan is right for you.

Life insurance plans are another savings option. If you die before your child enters college, tuition can be paid from the policy death benefit. During your lifetime, you can also use policy cash values to pay for some or all of your child's tuition. Cash values accumulate and can be used through withdrawals or policy loans. Several types of life insurance policies exist and should be discussed with your financial planner.

Qualified Tuition Programs are yet another savings tool to allow funds to grow tax-deferred and can be established by parents, grandparents, relatives or non-relatives. The tuition program typically allows you to make a lump sum contribution of $50,000 ($100,000 for married couples).

While there is no magic formula for saving for your child's college education, you can afford it if you plan ahead, set long-term goals and work with a financial expert to stay on track. Your child's future is well worth it.

COPYRIGHT 2006 Johnson Publishing Co.
COPYRIGHT 2008 Gale, Cengage Learning