It’s a smart move to start planning in advance. During the 2010-11 academic year alone, in-state tuition and fees climbed by almost 8 percent over the previous year at public four-year colleges and universities, reaching $7,605. At private schools, they were a whopping $27,293, according to the College Board. That compares to tuition and fees of $5,492 at public institutions and $20,980 at private schools in 2005-06.
It’s even more shocking if you use Sallie Mae’s future college cost calculator. If you are planing to send your now 2 or 3 year child to college, a school that costs $25,000 annually or $100,000 total today is estimated to cost $76,562 annually or $306,249 total in 15 years. This assumes a 7% annual cost increase. Inflation right now is 3.2% but is expected to rise and tuition has historically been around 1.2 to 2.1 times the rate increase of inflation.
What can I do to start saving now?
One option to consider is a 529 plan, which is a tax-advantaged savings plan intended to encourage savings for college. You have two choices when it comes to 529 plans. Pre-paid tuition plans are typically sponsored by state governments and have residency requirements. They allow you lock in tuition prices at certain schools. College savings plans allow you to set up an account for a beneficiary’s college expenses, and money can normally be invested things such as mutual funds and money market funds.
Earnings that are used to cover eligible college expenses aren’t subject to federal tax, and often are exempt from state tax. But if you use the money for another purpose, you’ll be subject to income tax and a 10 percent federal tax on earnings.
Are there other alternatives?
If you’ll be at least 59 ½ when your daughter goes to college, you could invest the money in a Roth IRA for tuition. That gives you the ability to withdraw the funds tax free, and there is no tax on the earnings. While that’s similar to a 529 plan, there are no limits on what the money can be used for, so you aren’t penalized if you use it for a purpose other than college expenses.
More Saving For College Questions? Ask a Finance Professional Below.
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