Long Term Planning

College Cost

Today, for many teenagers, the purpose of going to college is to increase their earnings. Basically, going to college is an investment. As with any investment, it is necessary to wage the expenses that are going in with the profit that will come out. Some college costs may not be worth the increase in income. Therefore, if the main purpose of going to college is to increase future earnings, make sure that the investment in college is worth the future return, salary.

First, consider other options. Is there another school where your child can go and get a similar education for less. Often times, the school that your child attends will not make that much of a difference in the long run.

Also keep in mind that for some professions going to graduate school is recommended. Therefore, plan ahead for this expense. One way is to save on the child's undergraduate education allowing enough savings for graduate school. But keep in mind the requirements for acceptance into a graduate program and make sure those requirements can be met at the undergraduate institution.

If you feel that your only option is a college that you can't afford, consider alternatives. If the college is close to home, the child can live at home and save significantly on educational expenses. Another good way to save is to attend community college for the first two years and then transfer to the private or state owned university. Your child will still graduate from the big school that employers will see on the resume, however the costs will be significantly lower. In addition, attending a state college can save a tremendous amount on college expenses, rather than attending an out of state college. There are also programs that allow you to graduate in three years rather than four. This will save an additional 25% of the college expense. Another option to consider would be to have employer assistance, where your employer reimburses for some of the college education. In addition, your child may consider taking time off school to pay for some of the expense that has accumulated.

Whatever the choice is, make sure your child is attending the right school for his needs. This includes whether he should be in college at all, the college expense is worth the rewards, and that there are no better options.

Right Way To Save For College

A proper way to save for college would be through the Section 529 Plan. Even though such plan might not be available in your state, you are allowed to use these plans in other states that do offer them. Using this feature allows you to save $50,000 for a child without any tax problems. This money is invested in a mutual fund, returning not just inflation return but a market return. The profits in the mutual fund are also tax-deferred. Only when the money is going to be withdrawn is when the child will need to pay IRS tax on that money. The plan also allows the child to go to any college that he or she desires and to use the funds within the plan. In addition, this money can also be used for graduate school, no matter how old the child is. However, if the money is not used for college expenses, then the money is subject to a penalty of 15% over the taxes. This is the only catch with this savings method.

Wrong Way of Paying for Children's College

Paying for children's college can have an effect of destroying most of the savings that have been accumulated throughout parent's lives. Some parents only start thinking about paying for their children's education when their children are in high school. However, by then it is too late. In order to efficiently plan for children's college, parents have to start early. There are multiple options that parents use today when faced with children's college expenses.

One of the most often used method for paying for children's college is using home equity. Parents might have significant equity within their house, with the goal of paying off the house by the time they are retired. However, once the children enter college, parents use this equity to pay for college. This has the inherent problem of leaving parents with a much larger mortgage balance, which puts them in trouble by the time retirement comes along.

The second option might be for students to take out loans. However, as seen today, these loans might haunt students for the rest of their lives, since often times these loans may be in tens of thousands of dollars.

The third option would be to use College Prepayment Plans. These plans offer parents to pay the tuition cost of college now for the ability of their children going to college when they are of age. However, this option does not guarantee that your child will get into the college and if he or she does, the price only covers tuition cost. In addition, the program might close down.

The fourth option that is often used is an education IRA. Although this option might sound interesting, it has a limit of $500, and prevents the parents from using the Hope Scholarship Tax Credit.

The fifth option is one of the simplest methods that parents often use, which is saving money in the child's name. Prior to 1986 this was a beneficial method of not only savings for the child's college, but also limiting taxable income. However, now any amount over $1,300 that is transferred into the child's account, is taxed at the same tax rate at which parents are taxed. In addition, once the children turn 18, the money is solely theirs and parents lose control over that money. Only imagination can describe what can happen then. The child might spend the money on luxury goods rather than invest it in college. If you are already in this position where you have the money saved under your child's name there is a way you can liquidate that account without alerting the IRS. You can spend the funds for the child's expenses, while at the same time saving the money that would have been spent if you paid for the expense, in your own account. In addition, saving for college in the child's account hinders the child's ability to get financial aid upon entering college because the government expects the child to contribute a large portion of their asset for their college tuition.

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