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Saving for College

by @BrettGraff / TheHomeEconomist.com

Whether you’re just recovering from the sticker-shock of stroller prices or are facing the fact that One Direction concert tickets command so much parental cash, brace yourself. Because the cost of college will really blow you away: estimated to be more than $230, 000 in 18 years.

Most of us moms are set on sending our kids to a university – even hoping for a really good one. But we are unprepared to pay. The typical family is on track to cover just 30 percent of their child’s higher education costs, according to a survey conducted by Fidelity Investments.

Sure, we can supplement with student loans — but with care. Yes, they are a stroke of good fortune – most kids couldn’t pursue degrees without them. But they’re also saddling. Before even considering a school’s curriculum, kids who seek loans must also consider the financial aid packages. What’s more, repayment begins the day after graduation. That’s an economic obligation causing young people to stay in jobs they don’t enjoy or even forego opportunities with great upward mobility, but small paychecks to start. Paying back loans can delay other life events, such as buying a home and – quite possibly, don’t forget — moving out of yours.

Section 529 Savings Plans: That title may sound confusing but these plans are simply named after the portion of the tax code that created them. Really, they’re just funds that invest in either stocks, bonds or a combination – but carry one big benefit: when you spend those gains on college tuition, books, or even room and board, you don’t pay taxes. Think about it: if you’re in the 25 percent to 35 percent tax bracket, you’d normally pay 15 percent on those gains. People in the highest tax bracket pay 20 percent on capital gains.

All states run an array of 529 plans. You can open an account in any one – you don’t have to live there — but some offer tax benefits for keeping your money at home. For example,  Colorado will let its residents who invest in the plan deduct from their state taxable incomes the entire amount of the yearly contribution. So if you put $1500 dollars in that 529 plan, you can reduce the amount of income on which you pay taxes by that same amount. (Nice.)

Most states offer an array of 529 plans to choose from. Some invest primarily in stocks,  some in fixed income, and some will invest your money more aggressively when the child is young but move the money to safer investments as she grows and you’re sure to need the cash soon.

Section 529 prepaid tuition plans. Again, they didn’t get more creative then the tax code title, but these plans let you pay tuition or buy credits at usually at a state school at today’s rates for your kid’s college education tomorrow – regardless of how many tomorrows that entails. If you consider that the cost of college rises about 5 percent each year, it’s a pretty good deal.

These are available only for your state school and many times and you have to pick one and hope the kid is accepted. If not, you’ll typically get back the average tuition rate at that school to use elsewhere.

Uniform Gift To Minors Accounts (UGMA): Open one through your bank or brokerage firm and you can deposit $1000 for your kid, tax free. The next $1000 you deposit is taxed at the child’s rate – usually between 0 percent and 15 percent.

The downsides to these accounts are that they’re in your kid’s name. First because colleges will consider this money when calculating the amount of financial aid they’ll award your kid, most likely lowering the allotment since they can see the student has access to this cash. Secondly — and also — because it’s in your kid’s name. That makes it your kid’s account. When the teen turns 18 he can use that money for whatever he wants – which could be buying a motorcycle instead of majoring in business, law or medicine.

It’s best we all start saving. Here, find the basics about the places for your funds today so you can afford college tomorrow. And see us at www.thehomeeconomist.com so you can subscribe (for free, of course) to the newsletter or follow us on Twitter @BrettGraff with information that can help you make smarter choices for better living. You should take this economy personally!

Brett Graff is THE HOME ECONOMIST,  writing a nationally syndicated newspaper column and updating www.TheHomeEconomist.com. Follow her at @BrettGraff.

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