Planning for College Costs

The sooner parents (and students) can start planning for college costs and setting aside the funds, the better. If you were able to earn an annual return of 11% on your money, and could invest $367.59 a month for 18 years, you could amass the $225,000 projected as the cost of college in the year 2015. If the rate of return were 7%, then a monthly amount of $577.06 would have to be set aside for your child's education at a private college or university. Both of these figures can be reduced significantly if the child is headed for a public university. Those institutions are expected to cost about $120,000 for four years in the year 2015.

Some suggestions for planning:

• Invest as much as you can early in the game, and rely on compounding of interest for the years of greater expense just before college. Remember that $5000 invested at the time of a child's birth will rise to about $33,000 in 18 years at an 11 % interest rate and to about $17,000 at the more conservative 7% rate.

• Consider investing in the stock market. In spite of recent uncertainty, the stock marked has always grown more rapidly than other forms of investment.

• Think about rental property as a vehicle for investment. Use the rental fees to pay off the mortgage, then either sell the property when the child is ready for college, or refinance it to pay for the costs. There are both positive and negative tax implications to consider. On the positive side, the property can be depreciated and expenses can be subtracted from the rental revenue. On the negative side, if the property is sold at a profit, it would be subject to capital gains, and the depreciation is considered as a gain.

• Establish an investment in your child's name, to enjoy a lower tax rate. Develop this strategy in consultation with a financial planner. College Center can tell you more. For now, remember that at age 14 the picture changes. The child enjoys a greater tax advantage, and the investments need to be shifted from high growth toward fixed income as college expenses become a reality.

• Buy Government Series EEE Savings Bonds that now earn 5.25% annual interest. These bonds do not incur income tax if designated for education. Keep an eye out for the enactment of the new federal tax bill, which may extend this tax exemption to Individual Retirement Accounts (IRA's).

• Life insurance offers another vehicle for setting aside money for college. It forces you to save regularly, and it eliminates the possibility that if you die, there would not be sufficient funds for your child to attend college. Under some life insurance plans the earnings build up on a tax deferred basis and are only taxed when they are taken out to pay for college expenses.

• Investigate college payment plans. Normally information about payment plans is sent only to financial aid applicants. Ask the Financial Aid Office to send you their literature on the subject. The Knight Agency of Boston, Mass, now a division of KeyBank is well known (telephone 800-225-6783), and so is the Tuition Plan in Concord, N.H. (telephone 800-258-3460).

What about financial aid?