Saving and investing for college

 

With college costs already out of sight and still rising, many parents feel the need to start saving early but have no idea where or how to begin.

Although children are a great blessing from the Lord, they are not cheap. One of the most expensive aspects of raising children is their college education.

Rising education costs
Even though the average rate of inflation in America has stayed low, college inflation has more than doubled, averaging between 3 percent and 7 percent, depending on the type of institution.

According to the Education Finance Statistics Center, by the year 2005 the projected four-year total (tuition, room and board) for public institutions will be $64,120 or more.

The projected cost for a four-year private education is $136,428 or more.

What parents need to understand
Scott Houser, a partner at Ron Blue & Co., believes that there are two things that a parent needs to understand when considering saving for college expenses.

1. Let the children know that paying for college is their responsibility as well as yours. Tell them while they are still in high school or middle school how much you are willing to pay for their college education. If they can find a school for that amount of money, great. If not, they will need the help of scholarships, financial aid, student education grants through the state and federal government education supplement programs, summer jobs, personal savings, employment during school, or on- campus student jobs.

2. Get started now. You want to start early because the amount of time you have available to let the principle of compound interest work for you makes a huge difference in your eventual investment results.

Funding education
Although scholarships and grants can help a student defray expenses, parents should not depend upon this source to fully fund their children's education expenses.

As parents begin the process of saving for their children's college expenses, they first need to decide on the kinds of accounts they want to use for the college education savings.

There are a number of options, but the following are the most common accounts.

* A Uniform Gift to Minors Act (UGMA) account. This kind of account puts the investment into the child's name. The parent gives up all ownership rights; however, the parent does retain control of the assets until the child reaches the age of majority (18 or 21 in most states).

* An Education IRA account. Parents who qualify (gross family income below $150,000) may contribute up to $500 per child (in 2003) per year. The contribution is not deductible, but all earnings in the EdIRA grow tax-deferred.

* State-Sponsored Prepaid Tuition Plans (529 Plans). In general, prepaid state tuition plans promise that your investment in the plan is guaranteed to cover tuition at any public school in the state, no matter the tuition cost at the time your child enrolls. The price is locked in regardless of future increases in state tuition.

* State-Sponsored College Savings Plans. These plans are established by individual states, but often they do not require you or the college student, unlike prepaid tuition plans, to be a resident of that state or attend a post-secondary institution in that state. These plans are established to conform to code section 529. For additional information about 529 plans go online at www.collegesavings.org, the website of the College Savings Plan Network.

* The Old Fashion Way. You may want to save for your child's education in your own account, in your own name in a variety of investment tools: insurance policies and annuities; fixed income investments (CDs, Series EE bonds, and zero coupon bonds); and no-load stock mutual funds.

Conclusion
How to fund their children's college education may very well be the number one financial concern of new parents.

With continued rising education costs, how could they afford to send their children to school? Is it good for my child to be encumbered with thousands of dollars worth of school loan debt?

It is never too early for a parent to begin to plan for their children's education. But they need to get informed, pray for wisdom and discernment, and then get started.

God is faithful and He will provide, but He also expects parents to be good stewards of the funds that He has entrusted to them by starting early to prepare for their children's educational future.

Copyright Crown Financial Ministries. Used by permission. All rights reserved. For more information about this and other financial resources, please visit www.crown.org.