SECURITY CENTER
COLUMNIST / BLOGS
TOOLS
PODCASTS/VIDEOS
How To Invest and Save Money
Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
a ton of variables and funding options that need to be considered before even setting aside that first dollar. College Funding By Britt Erica Tunick One of the biggest concerns facing most parents today is how they will pay for their children’s college education, and for good reason. According to The College Board, a non-profit organization focused on helping families with college planning, the cost of college has risen 5% annually over the past decade, significantly outpacing the growth of the average median income. Not surprisingly, some of the most common advice in regards to saving for college is that it is never too early to start. But how can parents determine how much they need to save before each child is ready to head off to college, and what is the best way to get there? The first thing parents of future college students should do is to establish whether they are setting their sights on public or private colleges for their children, with costs for the latter running up to four times higher. Location is also a factor to consider, as fees for in-state public schools average far less than out-of-state costs. For the 2013/14 school year, the cost of Rutgers University is $13,499 per year for in state students, compared with $27,523 for out-of-state coeds. Meanwhile, tuition, fees and room and board at Harvard University will run you $56,407 for the same 2013/14 school year, and that’s without factoring in the cost of personal and daily living expenses. As daunting as those numbers may be, the reality is that today’s college costs are nowhere near the amount parents will be looking at in the future. If the historical 5% annual increase in tuition costs holds steady, 18 years from now the freshman class at Rutgers can expect a four year degree for in-state residents to run $140,023, versus $271,159 for out-of-state students, while the parents of Harvard’s freshman class of 2031 should be prepared to pony up a whopping $585,100 for a four year degree. The most popular educational savings vehicles in the market today are Qualified Tuition Programs, more commonly known as 529 savings plans. Essentially mutual funds that are exempt from tax on any earnings they generate during their existence, so long as the money is ultimately used for “qualified education expenses” (i.e. tuition, fees, room and board and books at an accredited U.S. college or university), 529 plans provide federal –and sometimes state–t ax benefits. Named for the section of the Internal Revenue Code that they fall within, 529 plans are taken out in the name of the individual child they are ultimately expected to benefit, yet they allow the donor to maintain ultimate control of the funds. Much like mutual funds, 529 plan investors choose from a number of pre-determined investment strategies, with suggested tracts factoring in everything from the age of the beneficiary to the level of risk the investor is willing to take in hopes of generating the greatest returns possible. And the plans are transferrable to a different child, in the event the original benefactor ultimately eschews college. As with 401K savings plans, however, pulling the money out of a 529 plan is not without its drawbacks, and can mean as much as a 10% penalty and the need to pay back any state tax deductions the individual funding the plan may have received. A well-funded 529 plan can also hurt a child’s chances at receiving significant financial aid. Beyond the traditional 529 savings plan, parents also have the choice of what are known as prepaid 529 plans, which basically allow the investor to pay for their child’s future education by paying current tuition costs. Available in only a handful of states, such plans allow investors to lock in the costs of college by committing their child to a school within the state where they have pre-paid –though some plans do allow the funds to be transferred to other states if a child ultimately chooses a different educational path. Parents interested in pre-paid plans should be sure to carefully look at the rules governing these plans in the event that their child does not go to college in the designated state. In the midst of poor market returns in recent years, another method of college funding that has been gaining popularity is whole and universal life insurance policies, which provide guaranteed returns –generally in the long-term range of 4% to 5%. Since many life insurance policies allow the insured individual to take out tax-free loans against their policy, many people have found it appealing to invest heavily in life insurance policies. With so many funding options available, before doing anything parents should consider meeting with a financial advisor to determine the best options for their individual situation, and whether a mix of these strategies would be their best bet. It is also important to take into account the age of your children. Parents of infants and young children have the benefit of time, whereas parents of older children that have yet to establish any significant college savings may find their options aren’t as plentiful. But the first thing anyone looking to save for their children’s education should do is to determine roughly how much they will ultimately need –a task made much easier these days with the help of online college tuition calculators that factor in everything from a child’s current age, to the earnings an investment vehicle is expected to generate and even the current costs of specific schools parents may have in mind when determining funding needs. Parents interested in such online tools may want to check out The College Board’s college saving calculator at: https://bigfuture.collegeboard.org/pay-for-college/paying-your-share/college-savings-calculator |
Archive |