Determining the best alternative for financing a child's education is often a daunting task even for married couples. For divorced families, the task becomes even more complex.
In cases involving divorce, not only can there be differing opinions about who should pay education costs, parents can sometimes have opposing views about the schools children should attend or what their academic focus should be, and finding solutions can often turn into a nightmare. Not to mention a fact we all know to well; college is costly.
In fact, in the United States, the cost of higher education increases by approximately 6% per year and has consistently increased this way since the 1960s. At this rate, higher education will double in cost in about 12 years. This means today's six-year-old will face costs that roughly double what college freshman pay today.
Fortunately there are savings and investment plans to help, and you don't need a CPA to understand them. More specifically, there's a College Savings Plan know as the 529s.
Here are some important facts about the 529s you should know to help you better plan to pay for you child's college education :
- In recent years a growing number of parents have discovered 529 College Savings Plans (named for the section of IRS tax code they fall under). The government gave 529s special tax treatment because of a general concern about the spiraling cost of higher education and inflation.
- Government economists believe that a day will come when costs for a four-year college will reach as much as $250,000. The government passed legislation in support of 529s with the hope that families would embrace them in the same way many have latched onto 401(k) plans for retirement.
- So just what makes 529s so attractive? First, 529's (under the current legislation) aren't subject to capital gains tax as long as the money is used for qualifying higher education costs.
- Secondly, 529 assets are owned by individual parents, not the student. This gives parents control and keeps your child from using the money at age 18 for buying a new Harley or taking a trip to Cancun.
- Anybody can open a 529 with as little as $50 and a promise to invest $50 each month. Other family members can contribute to the 529 you've established for your child, so if your parents want to reduce the size of their estate, they can put money in your child's account.
- There are even free programs like www.upromise.com that work like points programs which make quarterly contributions to your account based on how much you spend with participating merchants for fuel, groceries, and many other daily expenses.
- 529 assets are also transferable without tax complications. So if Johnny turns out to be a superstar, gets a big scholarship, and doesn't need the cash, you can transfer it to the account of a child who does. Alternately, you can withdraw amounts equal to any scholarships your child earns without a tax penalty (you will have to pay capital gains on this portion though).
- With 529s you invest today in the plan of your choice. You can choose from fixed-income products, bonds, stock investment plans or a blend of each. You maintain control of the assets and get a tax break on the capital growth as long as you play by the rules
By doing some careful planning early on, you will be financially prepared to send your child to college. You will also have set a good example for your child as a prudent financial planner.
Brian Kilroy is a FWW supporter and retired Vice President of MBNA America Bank, N.A. He directed the Financial Advisory Service, an employee assistance, credit education and lending unit servicing MBNA employees worldwide.