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How to pay for your child's college education

Dollars for college

Editor’s note: Randy Barton (president/CEO, Assemblies of God Financial Services Group), Kathy White (director of financial aid, Evangel University), and Dayton Kingsriter (director, Assemblies of God Christian Higher Education Department) spoke recently about ways parents can pay for their child’s education.

PE: When should parents start saving for their child’s education?

BARTON: The obvious answer is the sooner the better. Realistically, for young families, it is difficult to save for a college education. I recommend allocating a portion of your income, which might be currently targeted for a retirement account, into a savings program for college education. The earlier you start, the less it costs you later.

WHITE: Because of the current and projected costs of an education, parents almost need to start saving as soon as a child is born. Unfortunately, we’re finding that a lot of parents are not saving. Even a small saving’s plan that’s started early would grow and help toward college. An 18-year savings game plan would [underwrite] part, if not all, the cost.

KINGSRITER: Start saving as soon as possible. In a practical sense, I’d say if you wait much past elementary school it’s going to be pretty hard to catch up because it’s taking more these days to attend college. But college is not a cost; it’s an investment. The question is how soon are you going to invest in your child’s college education?

PE: How much should parents expect to need for their child’s education?

BARTON: College tuition, room and board, books and fees usually range from $10,000 to $30,000 per year. For most families, it would be difficult to save $80,000 for each child to cover four years of college. I suggest a simple formula, where parents contribute one-fourth, your son or daughter works to pay for one-fourth, one-fourth hopefully is covered by scholarships, and one-fourth is covered by student loans.

WHITE: About $15,000 a year is needed for a school like Evangel University. But that is minimal when you consider most private colleges and universities start at $20,000 or $25,000. One thing to consider in planning for the future, however, is that college costs at some institutions are going up at a rate of 3 to 5 percent a year.

KINGSRITER: About $15,000 per year is the current average cost to attend an A/G regionally accredited college. In some cases state schools can be less because they’re subsidized by state funds. And then you have inflationary factors as well. College can be expensive, but again, if you don’t make the investment it could end up [limiting] your child’s earning power for years to come. One study says that a college education can increase a person’s earning power by $1 million over a person’s lifetime.

PE: What are other options to funding your child’s education?

BARTON: Here are four options:

Education IRA — Beginning in 2002, you can set aside up to $2,000 per year (increased from $500) in an education IRA. The contribution is not tax deductible, but the money accumulates tax-free and is withdrawn tax-free.

529 Plans — Under newly enacted federal laws, 529 Plans are clearly the best way to save for college. The plans grow tax-free, and distributions are completely tax-free when used for college education expenses. Unlike the education IRA, there are no income limits, and you could contribute as much as $100,000 in a single year without any gift tax consequences (a good way for grandparents to help). Unlike custodial accounts, the donor remains in control of the funds and can change the beneficiaries. You can move the funds among different family members or relatives. If the funds aren’t used for college, the parent or grandparent can get the money back by paying a 10% penalty and tax on the fund’s earnings. Many states also provide some form of state income tax deduction or even credit if they contribute to a particular state 529 Plan.

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