Ahead of the Curve

According to the College Board, the average cost of a four-year public college for the 2010-2011 academic year is $20,339. Attending a private college jumps the price to $40,476. With costs rising every year, it’s imperative for parents to plan early.

    “Families see college expense as a future expense, not a current one, but I suggest to my clients that they begin planning at birth,” says Kevin Galvin, VP of investments at UBS Financial Services. “They need to use time to their advantage.”

    Working with a financial planner can help guide families on the best college funding path. “We can look at the overall financial situation and see if they can earmark a certain amount of money on monthly basis to put aside,” says Moneta Group principal Patrick Howley III

    One of the most popular ways to save for higher education is through a 529 plan, which uses mutual funds from Vanguard and American Century Investments in Missouri. Contributions grow tax-deferred, and the earnings are tax-free as long as the money is used to pay for the beneficiary’s college expenses, says Maurice Quiroga, executive VP and managing director of PNC Wealth Management. While the returns are not guaranteed, putting in as little as $100 each month provides an opportunity for years of growth. “As a child ages, the risk tolerance of that growth drops,” Quiroga notes. “The government put in safety measures so there are adequate funds when that child goes to college.”

    A commonly overlooked benefit in a 529 plan is the accelerated gifting strategy that provides an opportunity for grandparents to get involved, as well, Quiroga explains, by allowing individuals to make a lump sum contribution without federal gift tax. “It does a grandparent no good to have a $10 million estate—half of which would be subject to federal estate taxes—and not prefund a 529 plan for their grandchild,” Quiroga says.

    Other savings plans include custodial accounts and Coverdell Education Savings Accounts (ESAs). Coverdell accounts can be used for educational expenses from kindergarten through college, an option that can be especially helpful for families who choose to send their children to private high schools.

    “Parents may say, Forget about college, we have to pay for high school,” says Galvin. “We need to keep them on a course that allows them to pay for everything.”

    Howley suggests parents gather information about private high schools while their children are still young so they have an understanding of the cost. Careful analysis will help families decide what institutions are appropriate for their financial situation. “In today’s economy, people are more cognizant of costs and what type of income their child is going to have after they finish school, so they are more diligent about making sure the cost justifies the degree,” Howley notes.

    With incomes, home equity and stock portfolios all suffering, families may have to forgo certain lifestyle luxuries to pay for higher education. “Parents should not sacrifice their own retirement to fund a college education, but they should think about having a smaller home or a less expensive car,” Galvin says.

    Financial aid and loans from the government, which have the lowest interest rates, also can help pay for college, while students can contribute by completing Advanced Placement courses in high school, earning scholarships and working. This creates a personal investment, says Howley. “Anything you pay for yourself, you get more out of. If students pay for part of their schooling, they’ll be more engaged in their education.”  LN