Early College Planning

Nearly all parents want their children to attend college. But it's not cheap.

So the time for financial planning is now, suggests CBS MarketWatch Correspondent Stacey Tisdale.

According to the College Board, the average cost of tuition at a public institution is about $13,000 for four years. And four years at a private college costs $58,000, just for tuition. There's also room and board, books, computers, travel and social expenses.

For parents who plan to send their kids to four-year colleges in the next 20 years, it will become even more costly.

Projected Total College Expensessize>

2005 $60,000$120,000
2010 $74,000$160,000
2018 $110,000$230,000
Source: Kiplinger's

When to Start

When it comes to saving for college, the No. 1 mistake parents make is waiting too long to get started.

What parents need is a good investment plan; that way interest will accomplish two-thirds of the savings for them.

When it comes to choosing a good investment plan, financial planners agree that the younger the child, the more aggressive investments should be.

For children up to age 12, the bulk of the investment should be in the stock market. Use a stock mutual fund, monitored by professionals.

Vanguard and Fidelity have funds targeted for various life events such as college planning.

General Rules oThumb:

  • When your child is 12 to 14, start to gradually transfer the profits from stock investments to "safe havens," such as Treasury bonds, certificates of deposit, or money-market accounts. This way by the time your child is ready to attend college, all the money earmarked for college will be out of the market.
  • By the time your child is age 14, take enough money for the first year of college out of stocks and put that money into safe havens.
  • You should have enough money out for the first and sophomore years by the time the child reaches age 15.
  • By the time your child is age 16, enough money should be out of the market for the first three years.
  • All the money should be in safe havens by the time your child is age 17.

Unlike the stock market, the bond market can offer a more predictable stream of savings.

Series EE bonds are popular for saving for college. They allow parents to invest in very small increments. Also popular are zero-coupon Treasuries, which allow investors to pick a maturity date.

For example, if your child is going to college in 2010, you could buy a Treasury bond now that will mature that year.

General information on bonds is available from The Bond Market Association online.

You can also invest and trade bonds online with www.tradebonds.com and www.bondagent.com.

Or you can buy bonds through a broker.

Other Investment Options

Education IRAs are an option, but they have a $500-per-year cap on contributions.

Another option is a Uniform Gift for Minors Act (or UGMA) bank account, in which the money grows tax-free. The grand total is taxed at the child's rate.

Government Help

State-sponsored college savings plans are soaring in popularity. Thirty-four states now offer tuition-savings plans with great tax advantages. These college savings plans invest in a mix of stocks, bonds and cash investments such as money markets or CDs.

You can get into these plans for as little as $50 per year. The plans grow tax-deferred. When you take money out, it is taxed at the child's rate. You can invest in any state's plan regardless of residency.

If you don't spend all the money in the plan, you can roll it over to the account of another child in the family, or designate a new beneficiary.

Types of State Plans

New York State's College Savings Program is a very popular plan; it's well managed. It allows New York residents to deduct the full amount of their contributions from state income taxes.

Minnesota's new EDVEST Program will actually mach some contributions.

Other highly ranked programs are College Savings Iowa, Delaware's College Investment Plan, and New Hampshire's UNIQUE College Investing Plan.

An excellent source of general information on these state-sponsored plans is the nonprofit College Savings Plan Network. Its Web site also provides links to every state's college savings plan.

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