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Funding a college education for a child is generally the largest purchase a family
will make, aside from buying a home. And college is expensive. In 2000, for example, the average one-year cost of tuition
and fees, and room and board, at four-year public colleges in the U.S. was $11,683 (Statistical Abstract
of the Unitied States: 2006. Table No. 280 Institutions of higher education - Charges 1985-2004). If this
annual figure is multiplied for four years of study, the total reaches $46,732. And that's not everything - these
figures do not included books, the cost of transportation to and from school, and other incidentals.
Not only is college expensive today, the cost of a college education keeps going up. Further,
higher education costs have been increasing at a rate faster than inflation. The average annual tuition and required
fees charged at four-year public colleges in the U.S. in 1985 was $1,386. By 2000 that figure had grown to $5,368, a
compound annual growth rate of 7.39%. In comparison, inflation, as measured by the Consumer Price Index (CPIW)(The
CPI is the Consumer Price Index for Urban Wage Earners and Clerical Workers, calculated by the U.S. Bureau of Labor Statistics),
increased from 1985 to 2000 by an annual compound rate of only 2.88%. Many experts expect that college costs will continue
to outpace inflation for the foreseeable future.
With very few families
able to pay for college expenses out of pocket, the planning and savings required to meet those costs should begin as early
as possible. HOW MUCH SAVINGS? The first step in the college planing process is to estimate the amount of monthly or annual savings
required to pay for college. This can be done with the help of a wealth manager or by using one of a number
of financial calculators available on the Internet. - Estimate the
total cost: Factors such as the current cost of one year of college, the number of years until college begins,
the number of years of study, and an estimated inflation rate are part of the calculation.
- Periodic savings required: Once the total cost is known, the amount
of monthly or annual savings required to meet that goal can be calculated. This number should take into account funds
that a family may have already saved.
Example: Assume a family has a five-year-old
child. College costs are currently estimated to be $10,000 per yea, and are expected to increase at 4% per year over
the next 13 years. The total amount needed at the start of college for four years will be just over $65,000. If
the family can earn 5% (after-tax) on their savings(Rate of return is for illustrative purposes only and
is not indicative of any particular investment; your results will vary), monthly deposits of approximately $298
will be needed to pay for the child's education.
Available cash flow: The next step is to compare available cash flow with the savings required.
If current cash flow is not enough to save the full amount, at least a partial savings program can be started. The family
can also plan for the future need to apply for financial aid or begin the search for scholarship funds.
ACCUMULATING THE NEEDED FUNDS There are a number of
excellent references and guides to investments and college planning available in bookstores and public libraries. State
and federal agencies involved in higher education also are excellent sources of information. In addition, there are
a number of sites on the Internet which can provide information. The next question usually faced
by a family planning for college is, "Where do we invest the money?" Many planners will recommend to
their clients that money saved for college should be placed in relatively low-risk investments. If there is a long enough
time frame, the savings may be placed initially in higher risk (and potentially higher return) investments. As the time
for college gets closer, the accumulated funds can be shifted into more conservative choices. The
ultimate decision will depend on a range of factors such as the number of years until college begins, the amount of money
available to invest, a family's income tax bracket, risk tolerance, and investment experience. A
second issue facing families planning for college is the question of "Who will own the funds?" The answer
to this question involves issues of control, income and gift taxes, and may impact any future application for financial aid. TAX ADVANTAGED STRATEGIES There are a number of tax-advantaged
strategies available to accumulate funds for college expenses. The rules surrounding these strategies can be complicated
and they should only be used after careful review with a tax or other planner. BEGIN
EARLY AND SEEK PROFESSIONAL ADVISE Developing a plan to save for a child's college
education can be complicated. Question can arise involving income, estate, and gift taxes, as well as investment issues.
Individuals are strongly advised to begin a savings program as early as possible, and seek professional financial planning
or tax advice before implementing a savings plan.
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