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The Cost of Higher Education

Starting Early to Save for College

Go Figure

Parents who invest $100 a month for 18 years at a modest 6 percent total return would have $39,000 when their child is ready for his freshman year at college.

If we all started to save for college the day our children were born, we'd probably be in pretty good shape by the time that baby reached 18 or 19 years old.

Unfortunately, most of us don't do that. Life and daily bills get in the way, meaning that all too often, the college fund is the last account on the deposit list each month.

If you're not convinced that it's important to start saving early for college, consider these figures from the T. Rowe Price investment firm. These numbers are the amounts parents need to save per month and per year at 10 percent return in order to have $100,000 saved when it's time for college.

  • Parents who start saving money when their child is born need to save $161 a month, or $1,938 a year.

  • Parents who start saving when their child is eight will have to save $447 a month, or $5,364 a year.

  • Parents who start saving when their child is 13 will need to save $1,140 a month, or $13,681 a year.

Unless you hit the lottery when your kid's 15, it's easier for most people to pay a manageable amount over a long period of time than a huge chunk each month for a shorter time. If your children are still young and you've decided you'd like to start saving for college early on, you've got some choices as to how to do so.

You could invest money in a uniform gifts to minors account, an educational IRA, 529 plans, EE bonds, or just accumulate money in your name that's designated for your child's college expenses. All of these methods have some pros and cons.

Traditional College Accounts

Money Morsel

Many colleges and universities offer payment plans and incentives to try to entice future students to their campuses. If you're interested in a particular school, see if there's a payment program you can get into early on.

Putting money aside in an account in your name that's designated as a college fund for your child is what financial advisers call a traditional college account. The money in that account is yours, which means you can use it in case of a real emergency. (Read Nontraditional Options for College Savings for some other ideas for saving for your child's education.)

If your child for some reason doesn't go to college, you simply use the money for something else. All income and capital gains from the account are yours, and must be reported on your annual income tax returns. This means that there isn't any compounding on the funds, and you won't earn interest on your interest. If your precious decides that he'd prefer to work on a shrimp boat in Louisiana instead of head off for college, however, all the money in the account is yours. This means of saving doesn't have any tax benefits, which has made it less popular as other, more tax-friendly methods of saving for college have been introduced.

Another tactic for funding a college education is to use proceeds from appreciated stock. Grandma, or whoever it is that owns the stock, can give it to the student, who can then sell it and apply it toward his first semester's tuition. He'll still have to pay capital gains on the stock, but they'll be based on the child's tax bracket, which is much lower than Grandma's.

You also can pay money directly to an educational institution for the cost of your child's education. There isn't any limitation to the amount you can give, except it must be earmarked for tuition. The funds must be paid directly to the college, not channeled through the student. Be sure to tell Grandma that she shouldn't pay any tuition funds to the college until she sees a bill, though. If she hands over tuition money to Cornell, for instance, and then your child decides to tour Europe instead, the money can't be returned. It becomes a charitable gift to the college.

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Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


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