1. Saving for College Doing Your Homework on College Funding
By Mark Helm, Arlington Financial Volunteer

2. Scary Statistics on College Costs
College costs have been rising dramatically
In 1984, tuition and fees (in today’s dollars) were $1,148 at the average public university and $5,093 at a private college
In 2004, tuition and fees were $4,964 at a public university and $19,710 at a private college
Including room and board, a public university costs about $12,000 a year, while a private college cost nearly $30,000

3. The Pain Won’t End
College Costs are expected to rise about 5% annually - compared with 2-3% for inflation
For child born today, you can expect to pay about $12,000 a year in tuition and fees at a public university and nearly $50,000 at a private college
In today’s dollars, that means tuition and fees at a public university will cost about $8,400 a year, while the annual cost at a private university will cost nearly $34,000
Add in room and board, travel expenses, books and computers, and parents can expect to need in the ballpark of $100,000 to send their child to a public university and $200,000 to a private school

4. Some Relief Most students receive some financial aid
However, much of the “free money” or grants tend to go to poor families or very best students
Recent study found that 37 percent of students with annual family incomes between $70,000 and $100,000 got some form of aid; 22 percent of those over $100,000
However, for these families that aid often is in the form of loans

5. Cost of Not Going to College
According to the U.S. Census Bureau, people with a bachelor's degree earn over 60 percent more on average than those with only a high school diploma
Over a lifetime, the gap in earning potential between a high school diploma and a B.A. (or higher) is more than $1,000,000
College is the path to the middle and upper- middle class in the United States

6. Options Don’t save for college Save for College
Hope for an academic or athletic scholarship
Have the child pay for school - builds “character”
Save for College
Best vehicles
Balancing with retirement savings

7. Savings Options Pre-paid Tuition Plans Tax-advantaged Plans
Coverdell/Education IRA
Custodial Accounts
Personal Savings Accounts
Roth IRA

8. So Which is Best? No perfect choice Each option has pros and cons
Best option will depend on your particular circumstances

9. Pre-paid Tuition Plans
Best plan that almost never works
Pros
Get tuition at a bargain price
Cons
What if you move
What if your child wants to go to a private college or an out-of-state university
Best for parents with older kids where the college choice is more clear

10. 529 Plans Pros Tax-free distributions if used for higher ed
Almost unlimited contribution limits
Donor retains control of account
State tax deduction ($2,000 in Virginia)
Considered parents’ asset for financial aid
Cons
Limited choices
High fees
Tax-free status expires in 2010
Shifting sands - states often switch sponsors

11. Virginia 529 Plan Run by American Funds 21 mutual funds to choose from
Not as many as it sounds
No value funds, no small cap
Very high fees
Sales fee of 6%
Annual fees run between 0.7% and 1.3%

12. Coverdell/Education IRA
Pros
Tax-free distributions if used for higher ed
Unlimited choice
Low fees
Funds can be used for private high school
Considered parents’ asset for financial aid
Cons
$2,000 limit on contributions
Income ceiling
$95,000 if single; $190,00 if married
Student has control of the funds

13. Coverdell vs. Virginia 529 Plan
For first $2,000, 529 tax deduction = 529 sales charge
Fees:
0.3% with Coverdell
0.8% with 529
Coverdell offers choice and flexibility

14. Education IRA vs. Virginia 529
Assuming an 8% return and contributing $2,000 a year, the Coverdell would grow to about $77,450, while the 529 would increase to around $68,950 - an $8,503 difference
If the parents actually saved the money from the tax deduction, the difference would be about $4,100.

15. Who should consider Coverdell
Families who aren’t going to save more than $2,000 per child
Families who can save more than $2,000 per child who don’t mind supplementing a Coverdell with a second account

16. Who should consider the Va. 529 Plan
Parents who want to save more than $2,000 a year and who don’t want to hassle with several accounts
Wealthy parents or grandparents who want to make a large lump-sum contribution
529 plans are the only vehicle that allow you to contribute up to $55,000 at once ($110,000 for a married couple) without gift-tax consequences

17. Other Options
UTMA/UGMA (Custodial Accounts)
Personal savings
Roth IRA

18. Custodial Accounts Pros Cons High contribution limits
Choice of investment vehicles
Lower tax on dividends and long-term capital gains
Cons
Considered the child’s asset for financial aid
Child takes control of money at 18 or 21
Income taxed to child each year
Under 14, first $800 is not taxed due to standard deduction; next $800 taxed at child’s rate (10%) and anything above $1,600 taxed at parents rates

19. Who should consider a Custodial Account
High-income families with older children who are not likely to qualify for financial aid
Can transfer highly appreciated stock

20. Personal Savings No tax-free distributions Pros
Lower capital gains rates make option more appealing
Use index funds or tax-managed funds
When it comes time to sell, consider gifting funds to child, so the sale is taxed at their rate
Can take advantage of big capital losses from the bear market
Total control - Can use for things besides college
Cons
No tax-free distributions

21. Roth IRA
Fund a Roth IRA with after-tax contributions. All withdrawals for retirement are tax free
Pros
No 10% penalty for withdrawals used to pay for higher education
Contribution withdrawals are not taxed
Can use for retirement as well as college funding
Cons
If Roth IRA owner hasn’t been invested for five years, ordinary tax will be due on earnings portion of distribution

22. Great Combo: Education IRA and Roth IRA
Use Education IRA as main savings vehicle supplemented by Roth IRA
Education IRA allows you to build up substantial amount of funds for college costs
Roth IRA can be tapped to fill in the gap if you feel comfortable with your retirement savings

23. College Savings vs. Retirement
Retirement wins
Before you consider college funding, make sure you are secure in your retirement funding
For parents and the child going to school, there are loans, tuition credits, scholarships and grants
Child will have 40 working years to pay off the loans
But when you retire, it’s the same as 25 or 30 years of being unemployed - where will you find the money to survive?

24. Don’t Worry if You Don’t Make It
It’s not the end of the world if you can’t pay the entire cost of your child’s education
Assume it costs $20,000 a year for college and you’ve only saved enough to pay for $10,000.
Along with savings, you can provide $2,000 a year
Child earns $5,000 from working (10 hours a week)
That leaves a shortfall of $3,000 a year or $12,000 in loans at the end of college
A loan payment of about $140 a month
For the price of a used car, your child will likely earn an extra $1 million over his or her lifetime

25. Teach Your Kids About Money
Getting a good education is the starting line in your child’s financial life, not the finish line
Many college students get into heavy credit card debt because their parents never taught them about personal finance
The country is filled with well-educated, well-paid people who spend their entire life struggling financially

26. Teaching Tips Talk about money Let your child see you handle money
Have your child follow a budget
Use allowance to teach long-term goal planning
Let your children make money mistakes