Many parents dream of the day their child strides across the stage to receive a college diploma. On the other hand, many parents dread the day that college tuition bills arrive. Despite steep tuition costs, however, a college education is still a sound investment that's within the reach for many families. All it takes is some advance planning.
Start with a Strategy
On average, tuition costs have been increasing between 4 percent and 6 percent annually in recent years. And consider this: four years at a public college or university for today's newborns could tip the scales at greater than $100,000, according to both Standard & Poor’s and The College Board.
That's why you may want to begin by developing an asset allocation — the mix of investments in your portfolio — based on the length of time you have until your child enrolls. The more time you have, the more you may want to rely on stock investments to reach your goals. Stock investments, while generally subject to more short-term market volatility than other investments, may offer the potential for higher long-term returns. As tuition bills appear on the horizon, you may want to shift your asset allocation toward potentially less risky investments, such as bond and money market investments.
Look at the Type of Account
In addition, consider the type of account you use to invest for a child's education. A Coverdell Education Savings Account, for example, lets you contribute up to $2,000 per year, and your withdrawals may be tax free if they are used to pay qualified college expenses.
Another avenue you may want to consider is a custodial account. The Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allows you to open an account in your child's name and potentially save on taxes. If your child is under the age of 18, the first $900 of earnings may be free from federal taxes, and the second $900 may be taxed at the child's rate, which could be lower than yours. Be careful though: Use of a custodial account could affect your child's financial aid eligibility.
Finally, don't overlook tax incentives and financial aid. The HOPE Credit and the Lifetime Learning Credit, two relatively new federal tax credits, can help offset qualified education expenses. Also, tens of billions of dollars are available in financial aid in the form of loans, scholarships and grants from government and institutional sources. For more information on how to meet the education challenge, contact your qualified financial professional today.
Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and director of HVFCU Financial Services, the investment division of Hudson Valley Federal Credit Union, which is based in Poughkeepsie, NY.
Securities and advisory services offered through LPL Financial, a registered investement advisor. Member FINRA/SIPC. Insurance products offered through LPL financial or its licensed affiliates. Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial.
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