Planning for College Expenses

One part of long term planning in life that concerns many families is education. No one needs to be told how much costs have gone up. The college I first attended now charges twenty times as much as it did at that time! How can people prepare, especially if a family has more than one child?

An excellent place to start gathering the information you need is to look at the Saving for College page on CNNMoney.com. It is a part of their Money 101 series.

Another part of this site is a page called the College Cost Finder. All you need to do is enter the name of the college and you will get a summary of expenses (tution, room and board, other fees). This is a terrific tool when planning for college expenses.

There are many ways that planning for college can go astray. Think carefully about how you look at future needs and act intelligently. Predicting the future is not as easy as we sometimes think. Think carefully and follow some basic guidelines.

Don’t put your own future in jeapordy for your children’s education. Their education may be important but it is not more important than your emmergency fund, than funding your own basic retirement fund or other basic needs.

Keep your savings in your own name. Everyone assumes the best of their children but assumptions often turn out wrong. If you do not want your hard earned savings to go for a sports car, or even worse someone’s drug habit, maintain control.

Look at the financial facts on any savings or investment form, not the name on the package. Banks and other institutions are good at putting names on things (ever have a Christmas savings account) and then giving you a smaller rate of interest than you might get otherwise.

Look for potential tax advantages. There are benefits associated with some of the special education savings plans and these are worth considering.

Many people like the 529 plans. Contributions to these savings plans cannot be deducted from income for your federal taxes but the income is tax-deferred and tax-free when used for a beneficiary's college education. Every state has one or more plan and state benefits vary from plan to plan. Check out College Savings 101: What is a 529 plan? for more information.

A Coverdell Education Savings Account is very similar as far as the national tax treatment. Contributions are limited to $2000.00 per year while 529 plans allow much larger amounts, in many states up to $300,000.00 in total. In view of college costs today the Coverdell limit is pretty small.

Alternatively you could make extra contributions to your Roth IRA and gain considerable advantages even though it is not specifically an educational savings vehicle.

A Roth IRA allows you to withdraw the total amount of contributions without tax or penalty at any time. This means that saving for a significant period of time in your Roth could provide what you need from that source alone.

In addition, you can draw from the earnings on your Roth IRA for family education, including children, without penalty. In this case you would have to pay tax on the income unless you meet the age requirement, but not the usual penalty for early withdrawal.

Persistence and patience are clearly needed in effectively dealing with this area of financial planning. Don't wait to decide what you will do. Make a plan early and stick to it.