Got $160,000? (For college)

January 2006 Special Advertising Section

Sticker shock
That’s what parents have when they see college tuition costs, no matter if their child is seventeen days or seventeen years old. Small wonder. By 2019, private college tuition could run $160,000 or more based on today’s inflation rates.

“Parents say, ‘What’s the point? I can’t save that kind of money,’” says Russ Kruse, Jr., senior vice president and manager of student banking for Minneapolis-based U.S. Bank.

Panic is common. But don’t close your eyes and wish that number away. Instead, take a closer look. Tuition doesn’t have to be as big or as daunting a goal as you might think, especially with a long savings horizon. Even those with less time have more options than they realize. On the following pages, Twin Cities financial advisers offer college tuition planning strategies for whatever stage you’re at.

Plan 1: You’re Parents of a Newborn Baby
Bleary-eyed parents might be overwhelmed by the array of savings options, but they have one really big thing going for them if they choose wisely: time. “The earlier you plan, the less pain out of your pocket on a monthly basis because of the power of compounding,” says Gary Tangwall, senior financial consultant at the Landmark Group division of Minneapolis-based Thrivent Financial for Lutherans.

Before committing dollars anywhere, however, assess where your college savings goals fit into your overall financial plan. Fully fund your own retirement first, advisers urge, because you won’t have the same loan, grant, or scholarship resources that little Jane or Joey will. Use an online financial calculator and websites such as savingforcollege.com to help break down your savings goal into monthly amounts. Then, take a look at your options, concentrating on mutual-fund–driven accounts for the best overall return on your investment.

• 529 College Savings Plans
“The 529 plan is really one of best things that’s come out in a long time,” says Lauren Ganz, investment representative with St. Paul–based Bremer Financial. These state-offered plans let you invest money in tax-sheltered mutual fund accounts—just pick a plan with an asset allocation that fits your needs and investment temperament.

“Be more concerned with fund family and performance rather than what state plan it is,” says Chris Zuck, a financial consultant for Associated Wealth Management, a division of Associated Banc-Corp of Green Bay, Wisconsin.

Parents like the 529 for its tax savings and flexibility: Withdrawals for higher- education expenses are tax-free, at least until 2010 when Congress decides whether or not to extend that provision. 529s also have high contribution limits. And grandparents can contribute—in fact, if they open the account, it can’t be considered an asset on the child’s application for financial aid. And the beneficiary can be changed if, for example, a child doesn’t plan on going to college or has qualified for scholarships and doesn’t need the money. 

• Coverdell Education Savings Account
If you meet the income limits ($95,000-$111,000 modified adjusted growth income single, $190,000-$220,000 joint), put away up to $2,000 annually in this tax-deferred account to cover elementary and secondary school expenses as well as higher education. This tool offers a greater choice of funds to invest in than a 529, Tangwall says. The account is transferrable to another beneficiary if your child won’t attend college, though the funds must be used by the time the beneficiary is thirty to avoid penalties.

• Roth IRA
Many parents are surprised to learn that a Roth IRA can be an education funding or savings tool. But if you meet the income cap requirements ($95,000 AGI single, $150,000 joint), after an initial five-year period, qualified contributions can be pulled out tax and penalty-free to spend however you like.

• Variable Universal Life Insurance
Besides guaranteeing your child money he or she would not otherwise have if you were to die prematurely, the “cash value” portion of this type of life insurance policy enjoys tax-deferred growth over time and allows you to borrow against it. “You’re keeping control so if a child does not go to college, you don’t have penalties,” Tangwall says. “Meanwhile you can take tax-free proceeds out to go toward your child’s education.”