Here’s a simple game plan to prepare for your child’s college tuition:
The thought of paying for college can be intimidating. Tuition, dorm fees, and living allowances are a lot different a decade ago. Analysts say that by 2015, annual tuition may double. Here’s a simple game plan to prepare for your child’s college tuition:
The sooner you start, the better off you’ll be, because of compounding. If you start saving when your child is born you will need to put only a lesser amount of money per month than when your child is already 10 years old. By then youmay need twice the amount to be set aside per month.
Save in your child’s name.
Open a savings account where money can be added by anyone. During birthdays or holidays, encourage relatives and friends to make contributions to this account.
Open an educational IRA.
Through these accounts, you save up to $500 a year in your child’s name. When the money is withdrawn, it is not taxed or penalized as long as it is used to pay for college. With a 10% rate of return, you’ll have $22,800 in 18 years.
Invest in yourname, too
Investing too much in your child’s name reduces financial aid. In the United States for example, the child is expected to contribute 35% of his or her financial assets, whereas you have to contribute only 5% to 6%. Taxwise, it hurts to place too much money in your child’s name, unless he or she is 14 or older and can benefit from tax breaks. Children under 14 get a break on the first @1,400 in income, but after that they pay taxes at your rate. Teens over 14 pay at a 10% to 15% rate on all income.
Invest in high-growth funds
Invest in financial companies whose growth rate has exceeded 20% over the past five years.
Many states let you prepay at a particular state college based on its current tuition. The downside of it is, your child is locked into that college.