College Saving 101: Sorting through the Choices

Here's an article from MSNBC on the basics of saving for college. The article covers everything from taxable accounts to 529 plans and gives a good overview of the pros and cons of each option. The article sets the stage by stating the obvious:

"Sending a child to college is one of the biggest financial challenges out there. And it’s not getting any easier."

While this statement is rather vague, they quickly move to the cold, hard costs:

"Last year, the average annual published price of tuition, fees, room and board for a private four-year college came to $27,516 -- up 6 percent from the year before, according to the College Board. A year at a four-year public colleges cost $11,354 – up 8 percent."

"If costs continue rising at roughly 6 percent a year -– the average increase for the past 10 years -– the total cost of a private four-year college a child born today, entering the Class of 2027 in 18 years, will hit roughly $325,000 -– assuming costs increase at about the same rate as they have for the past 10 years. For a public four-year college, in your state, figure more like half that amount."

And if putting together a huge pile of cash weren't enough, there are complications:

"Aside from the burden of setting aside all that cash –- on top of saving for retirement –- parents today face a mind-boggling set of investment choices, each offering various features, fees and tax savings."

And even if you find one you like, whether or not it's good for you depends on various factors:

"The best strategy for one family is not necessarily going to be the best for another," says Joseph Hurley from Saving for College.

He continues:

“You have so many options out there that it does become somewhat of a task to compare those options and put together a strategy that works in your own circumstances,” said Joseph Hurley, a Rochester, N.Y.-area accountant who has written about college savings and publishes savingforcollege.com, a Web site devoted to the subject. “Because the best strategy for one family is not necessarily going to be the best for another.”

But there's some good news:

"The first step for your plan is to take a deep breath. You won’t necessarily end up paying the full sticker price: some $122 billion in financial aid was available last year, according to the College Board. More than half of that was in the form of loans. So most families combine savings with college-funded financial aid packages, current income and loans to pay the bills."

But you do need to take action. Here's what MSNBC recommends:

"Once you’ve decided to start saving, you still need to figure out how to make your savings work hardest by sheltering as much of your college fund as you can from taxes. The good news is that there is a nearly endless variety of savings options: From taxable accounts to Education Savings Accounts to so-called 529 plans, set up specifically for college savers.  In general, these plans offer the biggest tax savings to those who use the money specifically for college. So if you’re not sure college is the goal, you may be better off waiting until your plans – and your child’s intentions – become clearer."

This is just a quick introduction to the piece. It goes on to detail the savings options and which may or may not work for you. If you have children of any age that you think may be going to college one day, I recommend you read College Saving 101.

Comments

[Jose]

My Advice:
*** Fund your OWN personal retirement accounts first (401k and IRAs).
Most of that money is shielded from the calculations that schools use to find out how much finantial aid they will give to your kid. However, you can take it out penalty free in some situations for educational expenses.

[geoff]

Since my wife and I are expecting our first child in December, this is good information to have. Education on this stuff is key to make the right/best choice.