Adding to the list of certainties, death and taxes, we can now add a third, price increases in education. With the average cost of attending a four-year private university at around $40,000, the average cost of attending a four-year public university at around $20,000 and the average cost of attending community college around $7,000, and increasing, there are some ways to help address this issue of increasing costs. One of the best ways to help pay for college is to develop a plan early on to set aside some money, however modest, to help pay for your student's education. Every dollar you set aside for college will reduce your need for students loans by a similar amount. And with special tax treatment of most saving options there are a few good ways to attack the problem. Here is a list of ways to help.
529 College Savings Plans
These plans are administered by the states and allow a family to set aside money tax free to save for college, much like a 401(k) plan does the same thing for retirement. These plans give the ultimate in flexibility as they are not subject to income limits and the assets in the plan may be transferred easily to another beneficiary if the student decides not to attend college. As long as the money withdrawn is used to pay for a college education the funds are not taxable. This allows even grandparents to set up these types of funds. The only real drawback is that your investment options are limited by what the states choose to offer. But for tax deferred savings it is hard to beat this option.529 Tuition Savings Plans
Once again these are administered by the states and allow a family to invest a certain amount of money to fix the tuition rate that the student will pay once they arrive at college. While many families choose this option figuring they will pay once and save a lot of money later on, it limits the student to certain schools, and, let's face it, only covers tuition. While you may be getting a great rate on tuition, room and board and books will still be growing with the rate of inflation. While some benefits are transportable to schools that do not participate in the plan your options are severely limited under this type of investment option.
Coverdell Education Savings Account
This type of plan works a lot like a Roth IRA. You are allowed to deposit up to $2,000 per year, subject to income limits, into a tax deferred account. When the money is withdrawn there is no tax liability as long as the money is used to pay for a college education. The investment options available are much broader than with a 529 plan. Funds in the account may be rolled over into a plan for another beneficiary.
US Savings Bonds
Series EE and Series I bonds are types of savings bonds issued by the federal government that offer a special tax benefit for college savers. If the bond is used to pay qualified education expenses and you meet income limits, the bond's earnings are exempt from federal income tax. The bond's earnings are always exempt from state and local tax. You have great flexibility here as unlike other plans these bonds do not have to be designated to a specific beneficiary when purchased.
The great thing about all the savings options is that for the calculation of the family contribution they are considered parental assets and subject to a large exclusion and a low asset allocation of about 5.6%. If they were considered a student's assets they would be subject to a much smaller exclusion and an asset allocation of 20%.
