If your client is the parent of a new-born or a young child, they may not yet have heard the news of what a 4-year college education is estimated to cost by the time their child is ready to head off for college. If they haven't heard, we are going to have to break the news to them. It has been estimated that for a public college 4-year education the cost will be over $100,000 and for a private 4-year education the cost will exceed $200,000! Have they caught their breath yet? Indeed, it does seem like a lot but take heed; it can be manageable for them if they follow the simple steps we have listed below.
Step 1 – Estimate the total cost of your child's education
The estimated cost per year for an in-state public tuition for college 18 years from now is $24,000. Private schools can and will be two to three times as much. Don't let these numbers scare them too much. Remember that part of their child's tuition can be paid through financial aid, scholarships, grants and student loans as well. So more likely than not, they are not going to be held solely responsible for the entire cost of their child's education. They can attain the part that they will be responsible for if they start early, contribute regularly and invest wisely.
Step 2 – Invest aggressively
The worst thing your client can do with their money is just dropping it in some passbook savings or money market account. They are going to need a lot more than the minute annual interest payments these kinds of savings plans afford. Stock funds have historically almost always exceeded other investments over periods of ten or more years. What they should be looking to invest in are mutual funds with low expenses that do not charge a fee to purchase or sell.
Do not just leave their money in one account for the entire period until their child attends school. They can make much on their investment by checking on the performance of the funds at least annually and moving under performing funds to a more financially benefiting fund.
Step 3 – Combining financial methods
If your client will be 59 ½ years of age by the time their child starts his first year of college, they may consider using a Roth IRA as an investment vehicle. The Roth IRA will benefit them, as withdrawals are tax-free as long as they have had the account for at least five years. Even if they are not going to be 59 ½ by the time their child will be starting college, the Roth IRA may still benefit them in same way, the only difference being they will have to pay taxes.
Education IRAs can be helpful as well. Although an education IRA will never afford you to pay for an entire 4-year education for your child as you can only make a maximum contribution of $500 per year, it can be a decent help to you, especially if you started the IRA when your child was young.
The Hope Scholarship credit can be of some help also. Although this will put an even smaller dent in your education costs than the Education IRA, the Hope Scholarship credit can be of help as you are afforded a deduction of $1,500 per year, as long as your adjusted gross income does not exceed a certain limit.
State College Savings Plans can be rather lucrative toward affording a college education. These plans give you the opportunity to earn stock-market returns on college savings you do not need for several years. Contributions grow tax-deferred until the money is taken out of the account to be used for college. When withdrawn, the earnings are taxed at the student's tax rate, which is often much more beneficial than if it were taxed at the parents' tax rate. Penalties can be incurred if the money is not used for college.
Through careful investing, you will be able to afford to pay for your child's future education by saving and collecting utilizing one or a mixture of the above financing strategies. Although the estimated costs for a 4-year education by the time your child reaches college age are extremely high, if you start early and take advantage of the time you have until that child is ready to leave the nest, you will be able to incur the costs that are not taken care of by financial aid, scholarships, grants and student loans.
