HOW TO PROVIDE FOR THE COST OF A COLLEGE EDUCATION
With the cost of a college education expected to continue rising rapidly in the immediate future, Keith R. Fevurly, CFP, an attorney and an academic associate with the College for Financial Planning in Denver, discusses how proper advance planning can help parents meet this staggering expense.
The cost of a college education is rising faster than the rate of inflation. During the past 30 years, costs at both private and public institutions have increased at an annual rate of 7.4%, far outpacing the general inflation rate of only 4.8%. The American Council on Education estimates by the year 2000 the total cost of tuition and fees, room and board and miscellaneous expenses for four years will be $104,800 at the average private college or university and $52,400 at a corresponding public institution. Given these figures, parents must develop a savings program to accumulate the funds necessary to meet these expenses.
The exhibit on page 83 shows the projected cost and required funding for four years of college during the next 16 years.
Historically, the three means of financing a child's college education have been
* From the current income of parents or relatives.
* With student loans, grants or scholarships.
* From a parent or relative's personal savings.
In recent years, a fourth way to provide for college education expenses has been introduced. Prepaid tuition plans, currently offered by four states (Michigan, Florida, Wyoming and Alabama), promise to cover the cost of four years at a state school when the child is ready to attend. However, such plans have recently been under attack by the Internal Revenue Service. Until they can be structured to achieve favorable tax treatment (or Congress enacts legislation to encourage their adoption), it's probably best to avoid prepaid tuition plans.
Of the first three funding methods, the ability to draw from one's personal savings, particularly if the funds are earmarked for college, is clearly superior. Using current income-the "pay as you go" method -is expensive, since it fails to account for the time value of money. Similarly, relying on student loans, grants or scholarships has some disadvantages. The availability of such money has diminished in recent years because of federal budget cutbacks, a trend likely to continue.
What, then, is the best way to structure a savings plan to fund college expenses? The answer involves two elements:
* Maintaining the funds in a manner that will take maximum advantage of tax deferral opportunities.
* Selecting proper investment vehicles to achieve the greatest possible return.
DIRECT TRANSFERS AND CUSTODIAL ACCOUNTS
In formulating a college savings plan, it's wise to consider how the funds will be held for the child's benefit. This leads to a consideration of income shifting, a process typically accomplished by either transferring funds directly to the minor child's control or establishing a custodial or trust arrangement on behalf of the child.
A direct transfer of assets into the child's name is simple, inexpensive and avoids taxation of the income at the parent-donor's presumably higher marginal tax rate. A direct transfer also works well if certain investments-for example, series EE government bonds-are the subject of the gift. In that case, taxes may be deferred until the child is of college age.
Custodial accounts are a second way of building a college fund. Sometimes referred to as a "poor man's trust," since they have virtually no administrative costs, custodial accounts involve naming an individual as the manager of property belonging to a minor child. There are two types of custodial accounts. Assets can be set aside in
* A state-sanctioned Uniform Gifts to Minors Act (UGMA) account.
* In some states, in a Uniform Transfers to Minors Act (UTMA) account. …