Paying for college 101

As young kids head back to school, many parents find themselves realizing that they’ll soon be sending those same little ones off to college — and that they have no idea how they’re going to pay for it.

According to student loan provider Sallie Mae, college costs today consume about 27% of parents’ income, not including funds borrowed as student loans. The good news is that that figure is down from 37% in 2009, in part because “free” money — from scholarships and grants —now accounts for 30%, up from 25%.

But the key to covering the remainder without going into debt, some say, is savings.

When it comes to college savings, you’ve got many options, including Coverdell IRAs, Roth IRAs, savings bonds and other traditional savings vehicles. Most often used, however, is the 529 college savings plan, an account that comes with several advantages.

• Tax advantages. All earnings and growth are tax free if used for qualified education expenses, and some states may offer additional tax advantages, such as deductible contributions.
• Flexibility. A 529 is set up with an owner, usually a parent or grandparent, and a beneficiary, the child. Once funded, 529 assets can be moved from one account to another without penalty.
• Control. Because the parent or grandparent is the owner, they still own the assets, and make all decisions for how they are used. If the kid doesn’t go to college — too bad — they have no access to the funds and you can transfer them to someone else. (If used for something other than higher education, a 10% penalty applies, but that’s better than having it all spent on a shiny new Corvette!)
• Estate planning. The 529 plan offers unique estate-planning benefits. For instance, wealthy parents or grandparents can contribute up to five times the current gift tax exclusion amount (for a total of $65,000) in one year, per parent or grandparent, per student.

Finally, pick out a savings schedule that fits you. Monthly? Per paycheck? Annually? In one lump sum? Pick the method that’s most realistic for your family — and stick with it.

Source:  Jennifer Openshaw, MoneyWatch

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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