For most families, saving for a college education is the second most expensive item of their lifetime, next to buying a house. But depending on where you live, and where your child wants to attend, four or more years at an institution of higher living could be even more expensive than the cost of a home.
What Does a Four-Year College Cost? It Varies.
There are more than 5,300 colleges and universities to choose from in America. But here in The Golden State, many students are quite content attending one of the 23 campuses of the California State University system, the largest four-year public university in the U.S. The annual cost of tuition, food, room, books, etc. for a resident is around $28,000 per year, or approximately $112,000 for four years. This may sound costly, but it’s fairly affordable for most families who live and work in a state with the third-highest cost of living in America.
In comparison, a typical college within the desirable, nine-campus University of California system will set you back about $36,700 per year, including tuition, room, meals, and books for an in-state student. Multiply that over four years and you’re looking at about $146,800 per student. Though some people we know spend more on their cars than that, this is still a lot of money to most families.
But if you want to aim higher for your child, many California families believe that the elite eight Ivy League colleges provide a truly prestigious education. Of course, the storied halls of Harvard, Princeton, Yale, Brown, and the other eastern schools have tuition costs that average about $56,000 per year, plus about $22,000 more for housing, food, and books. That totals about $76,000 annually or approximately $304,000 for four years. Is this worth it? Ask anyone who’s attended one of these campuses and they’ll nod in agreement.
Of course, there are hundreds of other highly prestigious colleges across the country
–– and none of them are bargains. What does all this mean? It means that the sooner you start saving for college, the more you can accumulate.
Start Now: Invest Well and Track Your Money.
To fund your family’s dream of a higher education, there are a variety of proven investment opportunities:
- Bank Savings Accounts – Open an account for your child and have him or her track their progress to learn the value of a dollar. Start small and watch your child’s money grow over the year with interest compounding and adding to the base amount –– monthly, quarterly, semi-annually, or annually. These accounts typically pay very low interest rates, but they’re a fun way to start saving.
- S. Savings Bonds – These popular investments are federal tax-deferred, state tax-free, and backed by the U.S. government. However, the maximum allowable investment is $10,000 annually, per owner, for each type of bond. In addition, the interest exclusion is not allowable for families with incomes between $117,250 and $147,250 (as of 2018) for married couples who file their returns jointly, or for individuals who earn $78,150 to $93,150 annually.
- Custodial Accounts – The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) enable an adult (a parent or grandparent) to act for the benefit of a minor (typically from age 18 to 21) to set up a custodial account at most financial institutions.As a custodian, the parent can make any decision on investments, while anyone can contribute to it. Upon reaching the legal age (between 18 to 21, depending on your state), the beneficiary can withdraw the account’s cash. For UTMA accounts, they can invest in stocks, bonds, annuities, mutual funds, and other types of insurance assets, while UGMA accounts do not include annuities, but do include stocks, bonds, mutual funds, and investments that are insurance-related.
- 529 College Savings Plan – The most popular and widely considered the best option for savings for college, a 529 account has much higher growth potential over time than a regular bank savings account or U.S. Savings Bonds.First, all earnings are tax-free. Second, the entire investment can go towards paying for college fees. Third, compound interest is included in your earnings.
Fourth, all withdrawals for college expenses up to $10,000 annually in K-12 tuition avoids federal taxes. Fifth, your maximum investment can exceed $500,000 for the account’s life. Sixth, deposits up to $15,000 annually can qualify for an annual gift tax exclusion. Seventh, if you contribute $75,000 in one year, it can be sheltered from taxes over a five-year period. And eighth, this type of plan can receive a favorable financial aid treatment.
The only negatives are that your earnings are subject to both income tax and a 10% penalty if your withdrawal is not spent toward qualified expenses for your child’s education.
- Mutual Funds – Talk to your broker about what fund among thousands of available investments are best for long-term growth over a span of 15 to 20 years. You can use these assets to pay for education, as well as travel to and from college, a car, and more.
Your earnings are subject to annual income taxes, and you’ll be taxed on capital gains once you sell your mutual fund shares.
- A Coverdell ESA – Similar to a 529 account, a Coverdell Education Savings Account offers both tax-free investment growth and withdrawals when your funds are spent on education expenses, even for K-12 fees. You can choose from a wide range of options for your investments, and you can count its value as a parent asset on your FAFSA.However, you can only invest up to $2,000 per beneficiary annually, you must make all contributions before your child turns 18, and it’s limited to individuals who earn between $95,000 to $110,000 annually, or married couples with income between $190,000 to $220,000 per year.
- Family Trusts – One of the easiest and least stressful ways to accommodate the costs of a college education is to provide your younger beneficiaries with an endowment through your family trust account.
Sunstone Trust Company’s Trustee Services let you set up a Life Insurance Trust, a Grantor Retained Annuity Trust, an Asset Management Trust, or an Irrevocable Children’s Trust. Each of these trusts can help defray and pay for that future college education that will only cost more in years to come.