When it comes to college costs, there's bad news and good news. And if you have children whom you'd like to send to college someday, you need to be aware of both the bad and the good.
Let's get the bad news over with first: College is expensive, and the costs are still going up significantly every year. Take a look at these figures, recently released by the College Board: At public four-year institutions, in-state students now pay, on average, $13,589 per year for tuition, fees, room and board. And it's $32,307 per year for private, four-year nonprofit institutions (which represent the vast majority of private colleges and universities).
At the same time, we've seen a slowdown in federal student aid. In fact, according to the College Board, total federal grant funding to undergraduates was lower in 2006-2007 than it was three years earlier, after adjusting for inflation. The average full-time student at a public four-year school receives about $3,600 in grants and tax benefits, while the student's counterpart at a private college gets about $9,300 in those forms of aid.
Clearly, these numbers are causes for concern for most parents. But don't panic - because, as promised, there's also some good news in the college-funding arena. Specifically, you have some attractive college savings vehicles available to you, including these:
Coverdell Education Savings Account - Depending on your income level, you can contribute up to $2,000 annually to a Coverdell Education Savings Account (ESA). Your Coverdell earnings and withdrawals will be tax-free, provided you use the money for qualified education expenses. (Any non-education withdrawals from a Coverdell ESA may be subject to a 10 percent penalty.) You can place your contributions to a Coverdell ESA into virtually any investment you choose - stocks, bonds, certificates of deposit, etc.
Section 529 savings plan - In a Section 529 savings plan, you put money in specific investments, managed by an investment professional. Contribution limits are quite high - more than $200,000 per beneficiary in many state plans, although special gifting provisions may apply. And all withdrawals will be free from federal income taxes, as long as the money is used for a qualified college or graduate school expense of your child or grandchild. Withdrawals for expenses other than qualified education expenditures may be subject to federal, state and penalty taxes. (Also, Section 529 distributions will appear as income on the child's tax return, which could affect financial aid calculations.) There may be tax benefits for residents who participate in their own state's plan.
Permanent insurance - If you own some type of "permanent" insurance policy, such as whole life or universal life, you'll have a chance to build cash value. Your earnings will have the potential to grow on a tax-deferred basis, and you can take policy loans for virtually any reason you choose - including paying for college. Keep in mind, though, that if you don't fully repay the loan, your policy may lapse, and if you pass away before repaying the loan, the total amount owed, including interest, will be subtracted from the death benefit.
Contact me to see which of these options may be most appropriate for your individual situation.
You can listen to Kristina Clark discussing college savings on KAXE Radio here .
