The average household with a teenage child has saved $21,416 for education, according to data released this year from Sallie Mae. That is good news and bad news.The good news is that $21,000 is a great start! The bad news is that it is far less than the $164,000 that a four-year private college will cost or the $74,000 that a four-year public in-state school will cost. Tuition costs are rising faster than the national inflation rate and so is student loan debt.
A few years ago, one of our sons walked across the graduation stage to receive his diploma from the University of Georgia. It was a beautiful moment when the new graduates tossed their caps into the air in celebration of their achievement.
But as the caps were scattered across the lawn, I wondered how many of these graduates will be paying for this moment for the next 20 years? Unfortunately, the data indicates that most have some level of student loan debt when they graduate.
The average debt for the class of 2012 was $29,400, according to a report released by The Institute for College Access & Success Project on Student Debt. This is up from the $26,600 for the class of 2011. So the moral of the story is that college costs are high and borrowing money to pay for it is a bad idea.
Start Saving Now
Every dollar a student or family saves toward their college education is aneffective savings of two dollars that would have been spent if the tuition werepaid for with a student loan. This is a big incentive to avoid paying 200 percentmore for your education if you have to borrow money to attend school.Recruit the help of your future student. Provide motivation to sock away some oftheir personal savings or income from jobs they earn or monetary gifts from grandparents or others to go towards their education fund. We matched any funds our boys saved, dollar for dollar. Fortunately our boys were able to receive scholarships, worked during college, and drew from their educational funds we had saved to avoid any student loan debt.
Education Savings Accounts
Several programs provide tax incentives for those saving specifically for futureeducation. SavingforCollege.com has some great resources that allow you tocompare a variety of plans.
A 529 Plan is an education savings plan operated by a state or educationalinstitution designed to help families set aside funds for future college costs.It is named after Section 529 of the Internal Revenue Code, which created thesetypes of savings plans in 1996.
529 Plans can be used to meet costs of qualified colleges nationwide. For mostplans, the state your 529 savings plan originates from doesn’t affect your choiceof school. You can be a California resident, invest in a Vermont plan, and sendyour student to college in North Carolina. Check to see if your institution iseligible under 529 rules.
As long as the plan satisfies a few basic requirements, the federal tax lawprovides special tax benefits to you as the plan participant. These 529 plansshield investment gains from taxes as long as the funds are used to pay forqualified higher-education expenses. Some state-sponsored funds also offer taxbreaks on state income taxes. Qualified expenses include fees, books, supplies,tuition, and equipment required for enrollment or attendance at a college oruniversity.
529 plans are usually categorized as either savings or prepaid plans:Savings plans work much like a 401K or IRA by investing yourcontributions in mutual funds or similar investments. The plan offers severalinvestment options from which to choose. Your account will go up or down in valuebased on its performance.
Prepaid plans let you prepay all or part of the costs of an in-state publiccollege education. They may also be converted for use at private and out-of-statecolleges. The Private College 529 Plan is a separate prepaid plan for privatecolleges.
Coverdell Education Savings Accounts
A Coverdell Education Savings Account is designed to pay for qualifiededucation costs. It’s for beneficiaries under 18 years old. Cash must be used tofund the account, and the total contribution maxes out at $2,000. Unlike a 529account, the contribution is not deductible from state taxes. The beneficiaryreceives tax-free distributions for education expenses, and the funds in theaccount must be distributed by the time the student turns 30.
The cost of higher education cannot continue to rise as dramatically as it has inthe past 20 years. With more students finding on-line, distance learning a cost-effective option, tuition will likely begin to drop over the next decade. I hopestudents and families will save now and find alternative ways to fund theireducation and avoid student loan debt.
More
Do You have a Retirement Plan?
This article is courtesy of HomeLife Magazine.