Today you send them off to school with a "superhero" lunch box or Barbie backpack. Before you know it, you're loading the car with real luggage and about every piece of clothing they own --- it's time for college. You send your dreams with them; they bring you back the bills. Will you be ready?

What Every Parent Should Know

As you begin to consider how, and how much you will pay for higher education, there are many important factors to consider:

1. You Will Pay- Despite the wide availability of scholarships and grants, nearly 80% of college expenses are paid by the family and/or through loans.
2. More Than Four Years - College isn't always a four year experience. Because of infrequency of course offerings, class size limitations, and 5-year degree programs students do not always finish their studies in four years. Also, a graduate degree may be necessary for many occupations. Therefore, parents may want to consider underwriting college as a five or six year obligation.
3. Student Loans Increase the Cost - Usually called financial aid, student loans are often the only alternative for families who have delayed planning. But, no matter how reasonable the loan rate, it's not uncommon for "financial aid" to increase the cost of college by thousands of dollars.

Key Questions

How you attack the college funding issue depends on your particular situation. Obviously, the number of college educations you must fund is crucial, as well as the timing of each. Supporting two or more children in college at the same time is a challenge.

The time available to save is a critical factor. The more time you have to accumulate your college fund, the better. You also have to factor in the future cost of college, allowing for inflation. (The college tuition inflation rate has outpaced the standard rate of inflation in recent years.)

Where your children attend college (public or private) and what percentage of the total cost you plan to provide are also key considerations.

Ways to Save for College

Your long range financial plan, which ideally begins when the children are young, will better enable you to meet college expenses with funds more easily accumulated over time. Consider the following options when building your college saving plan:

1. Invest for Growth - For long-term planning, investment vehicles such as mutual funds that are designed for long-term growth are an excellent choice for college funding. (Saving bonds and similar income oriented vehicles simply do not offer the growth potential most families need to make their goal.) Mutual funds offer diversification, flexibility and the potential for substantial growth. Money can be placed in mutual funds in a lump sum or can be set up with investments of as little as $25 a month.
2. Gifts To Minors - "Custodial" accounts, where the child owns the assets but a parent or guardian oversees them, are an option. These accounts can be funded with mutual funds or other investments. The tax advantages they offer make them very attractive for some families. However, assets held in a child's name have an affect on future financial aid eligibility. This issue along with the future control of the assets, must both be seriously considered before opening custodial accounts.
3. Educational IRA - With the passage of Tax Relief Act 1997, parents, relatives and anyone else can contribute to a child's education through an Educational IRA (EIRA). An EIRA can be established to pay for qualified higher educational expenses of a designated child. Depending on your annual adjusted gross income, you can make nondeductible contributions of $500 annually for each child under 18. When it is time to use the money, all distributions and earnings are tax free if used for qualified expenses. Unqualified withdrawals may be subject to a 10% penalty. The funds must be used by the time the "child" turns 30 or be rolled into a younger family member's EIRA to avoid a penalty.
4. Withdrawals From IRA's - Another strategy is to take early withdrawals from your IRA and Roth IRA accounts to pay for qualified educational expenses. While this will likely mean paying taxes on the amount withdrawn, money used for qualified educational purposes would be exempt from any penalty. For some, this plan might have a negative impact on retirement planning, for others it offers tax deferred growth for educational investments.
5. Tax Credits - Recent tax legislation has also approved two educational tax credits. Anyone already in or entering college may qualify for either the Hope Scholarship or the Lifetime Learning Credit. The Hope is worth a maximum of $1,500 a year for the first two years of college. The Lifetime Learning Credit, which can be used in subsequent years, could save you $1,000 a year in taxes through 2002, after which the credit is $2,000.
6. Other Options - many parents also look to a range of other sources to pay for college such as borrowing against the equity in the house, or directly from a company retirement plan (401k). Many will also plan to fund a portion of the cost out of future income.

Summary

Parents don't have to "break the bank" or the family budget, to send their kids to college. The key is to start early and make the commitment based on an assessment of your goal, options and overall financial plan.

Contact Don Coffin, Financial Advisor with Waddell & Reed Inc., to assist you in developing a college funding program for your children or analyzing your current plan today. Don can also be reached at (203) 281-7018.