Saving up money for college

There’s no denying the benefits of a college education: the ability to compete in today’s competitive job market, increased earning power, and expanded horizons. But these advantages come at a price — college is expensive. And yet, year after year, thousands of students graduate from college. So, how do they do it? Many families finance a college education with help from student loans and other types of financial aid such as grants and workstudy, private loans, current income, gifts from grandparents, and other creative cost- cutting measures. But savings are the cornerstone of any successful college financing plan.

College costs keep climbing

It’s important to start a college fund as soon as possible, because next to buying a home, a college education might be the biggest purchase you ever make. According to the College Board, for the 2014/ 2015 school year, the average cost of one year at a four- year public college is $ 23,410 ( in- state students), while the average cost for one year at a four- year private college is $ 46,272. Though no one can predict exactly what college might cost in 5, 10, or 15 years, annual price increases in the range of 4 to 7 percent would certainly be in keeping with historical trends. The following chart can give you an idea of what future costs might be, based on the most recent cost data from the College Board and an assumed annual college inflation rate of 5 percent.

Focus on your savings

The more you save now, the better off you’ll likely be later. A good plan is to start with whatever amount you can afford, and add to it over the years with raises, bonuses, tax refunds, unexpected windfalls, and the like. If you invest regularly over time, you may be surprised at how much you can accumulate in your child’s college fund.

College savings options

You’re ready to start saving, but where should you put your money? There are several college savings options, and it’s smart to consider tax- advantaged strategies whenever possible. Here are some options:

529 plans

529 plans are one of the most popular tax- advantaged college savings options. They include both college savings plans and prepaid tuition plans. With either type of plan, your contributions grow tax deferred and earnings are tax free at the federal level if the money is used for qualified college expenses. States may also offer their own tax advantages. With a college savings plan, you open an individual investment account and select one or more of the plan’s mutual fund portfolios for your contributions. With a prepaid tuition plan, you purchase tuition credits at today’s prices for use at specific colleges in the future — there’s no individual investment component. With either type of plan, participation isn’t restricted by income, and the lifetime contribution limits are high, especially for college

savings plans.

UTMA/ UGMA custodial accounts

An UTMA/ UGMA custodial account is a way for your child to hold assets in his or her own name with you ( or another individual) acting as custodian. Assets in the account can then be used to pay for college. All contributions to the account are irrevocable, and your child will gain control of the account when he or she turns 18 or 21 ( depending on state rules). Earnings and capital gains generated by assets in the account are taxed to the child each year. Under the kiddie tax rules, for children under age 19, and for full- time students under age 24 who don’t earn more than onehalf of their support, the first $ 1,050 of earned income is tax free, the next $ 1,050 is taxed at the child’s rate, and anything over $ 2,100 is taxed at your rate.

A last word on financial aid

Many families rely on some form of financial aid to pay for college. Loans and work- study jobs must be repaid ( either through monetary or work obligations), while grants and scholarships do not. Most financial aid is based on need, which the federal government and colleges determine primarily by your income, but also by your assets and personal information reported on your aid applications. In recent years, merit aid has been making a comeback, so this can be good news if your child has a special talent or skill. The bottom line, though, is don’t rely too heavily on financial aid. Although it can certainly help cover college costs, student loans make up the largest percentage of the typical aid package. Generally, plan on financial aid covering the following percentage of expenses: loans — up to 50 percent, grants and scholarships — up to 15 percent, work- study — varies. The lesson: the more you focus on your savings now, the less you may need to worry about later.