Written by Sean Pollock

Tuesday, 07 July 2009 00:00

One of the greatest gifts we can give to our children is college education. According to the US census bureau study, people with bachelors degree earn on average $2.1 million over their entire working life, while high school graduates make only $1.2 million. Looking at these numbers, you can think of college education as an investment in your childs future, which will return a bigger paycheck to your child every month of his work.

Since everything in our life comes at a price, so does this one. The price for going to college usually consists of tuition, room and board expenses, books and other things. College degree costs mostly vary by college type (state university, private university, community college) and the location (in-state, out-of-state, living with parents or separately). According to College Board report "Trends in College Pricing in 2008" today the whole endeavor then will cost you from $14,300 a year, and up to five times more.

Careful financial planning is your key to reducing the college costs. One obvious side of such planning is saving money. You can establish a 529 tax-deferred account, specifically designated for your childs college funds. Money in 529 tax-deferred accounts grows faster, and you do not have to pay income tax at all if you use it for education.

Because the 529 is a state sponsored program, there are appointed asset management companies, that are allowed to run your plan. The accounts within those companies can be of any type: cash, investments, money market, just about anything. Every parent, relative or even a friend, can contribute to your childs college fund via the 529 savings program. Beneficiaries in those accounts are interchangeable, so if one child does not use the money, it can be easily designated for another one. However, if the money is not used for educational purposes, it can only be withdrawn after paying an applicable penalty.

What is the best strategy for college savings? What assets to invest in and in what proportions? Stocks are risky, bonds are safer, and cash is the safest. The answer depends on how much time is left until the college starts. If your child has more than 12 years until college, you can tolerate more risk and invest a larger portion in stocks under an aggressive strategy. If the time is limited to 12-4 years, you will want to use moderate strategy, and balance your assets between stocks, bonds, and money market instruments. Finally, within the last 4 years before college, you are best off fixing your gains by shifting into all conservative bonds and CDs, and excluding stocks altogether.

What will happen if instead of saving money in a college fund one relies on student loans? Although there is a wide variety of student loans, in the end your child will usually face a great deal of debt to repay right from the start of his or her professional career. Coincidently, this is the time when a young adult needs money the most to start a new family, purchase a home, a car this list goes on and on. Even with low interest rates and tax breaks available for student loans it is treated as any other loan: the interest accumulates and you can easily end up paying twice the size of your originally borrowed amount. This does not sound like fun, but let me bring up those numbers again: $1.2 million lifetime earnings for high school graduates, versus $2.1 million for college graduates. The difference is $900,000 which is more than any college expense, which is why having a college degree pays off.

You can also optimize your finances in order to increase the chances of getting a financial aid. When your child applies for the aid, the college considers your family income for that year. The lower income you show, the higher are the chances to qualify your child for financial aid. If you run a private business, try taking as little profit out of the business that year as possible. If you are invested in financial markets, minimize your capital gains by taking less profit that year out of your accounts. Finally, if you are planning an extensive medical treatment, this is the right time, since it will also help you show a lower net income.

Planning for college education can be as complex as retirement planning. To find the best strategy you need to consider your overall financial situation, college tuition trends, as well as the economy expectations, tax laws, and numerous other details. To your benefit, those details have already been built into our proprietary Financial Analyzer. You dont have to delve into the numerous ever-changing details or do the extensive research. All of it has been done for you. All you have to do is to tell that Analyzer where you stand and what you want, and it will deliver your solution right to your desktop within just seconds.