College Savings Funds

2007-07-24 08:31:47

( Financial )



High Costs of College

Unless you are well-endowed or have recently won the lottery, you need to start saving for college as soon as you can. Tuition, books, accommodations and other expenses related to college have risen exponentially and will continue to do so.

Saving for college is not that simple. Deposit interest rates have plummeted to less than two percent per annum, so it is no longer lucrative to place your money in a regular savings account. Besides, the interest you earn from traditional savings accounts are subject to government taxes. You need to find a better alternative to make your college savings funds grow at a faster rate if you want to avoid borrowing.

Alternative College Savings Funds

There are taxable investment accounts which can earn higher interest rates than regular bank savings accounts. However, these investments are subject to taxes, and the amount that you get at the end is only your own invested funds plus the interest earnings.

A better alternative would be the 529 college savings programs, where you contribute a stipulated amount either annually, quarterly or monthly. The amount you will be receiving at the end of the term depends on the amount you have contributed each period. 529 college savings plans already predict how much you will need for tuition, books and living expenses at a future time, as the projected increases correspond to the average rise in costs of education. This type of college savings fund is also tax-exempt up to a certain amount, and amounts of contribution vary by state.

Another good investment package is the custodial account, which is a multiple-purpose savings plan that you can start for a child of minor age. While this plan is subject to taxes and also has an exemption limit, the tax rate is lower.

How to Choose the Right College Savings Plan

Choosing the right college savings plan depends on some factors. You need to figure out exactly how much you are expected to spend, as well as how much time you have to save for it. You will need to set aside less amounts of money each year if you start the college savings funds while your child is at a young age.

Another major factor is how much you can afford to set aside from your own disposable income. A major pitfall of most parents is to start the college savings funds at high investment requirements, only to cut the investment plan short when they could no longer afford it. Be realistic about your college savings goals, and be ready for any situation that might disrupt your savings activity. You may also want to enroll in a life insurance plan as coverage for your savings plans.

Before choosing the college savings plan, talk the matter over with a financial adviser. Choose only a reputable company to entrust your college savings funds to ensure that you will have the funds available by the time your child is ready for college.


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