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Saving For College

By Lisa B. Samalonis

Three months after their daughter Amy was born Greg and Jane Holmes of Hamilton, NJ, started saving for her college fund.

"We've gone from the Michigan 529 plan to New York and back to Michigan," says Greg, who explains that he evaluated the plans himself through Money magazine, Kiplinger's financial Web site, USA Today and other articles.

"We opened our first account with $1,000 and contributed $120 monthly. We've slowly increased the amount to $160 monthly and we are holding there," he says. "We find college saving a doable proposition. With regular monthly contributions, you plan for it, so it doesn't feel as though you're constantly spending on the college savings plan. I believe people should try to plan for college immediately after a child is born, provided it is in their means. Whenever, I check to see how much we have saved, I get a feeling of accomplishment," he adds.

The Holmes' efforts will lessen their future burden. The cost for college born in 2004 will range from $193,000 for college up to about $400,000 for private college according to the most recent estimates, says John Diehl, a Certified Financial Planner and Vice President with The Hartford, a financial planning company located in Simsbury, Conn.

"I see clients struggle with the college savings test every day. They feel squeezed and caught between day-to-day budgeting demands and the need to save for their own retirement. College planning becomes an afterthought, when it really should be an integral part of the plan," Diehl says.

Tips for Saving

Tip #1: The Power of Tax Deferred Growth.
The U.S. Government gives us the opportunity to save up to $11,000 annually per parent toward a college education through what is known as a Section 529 College Savings Plan.

529 savings plans - named for the federal law that created them in 1996 - allow a parent, other relative or friend to open a tax-deferred college savings plan with as little as $25 to start in some states. A 529 college savings plan is NOT the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that - tax-deferred savings plans that allow you to save for tuition for in-state schools. All 50 states now offer their version of a 529 college saving plan, and you can usually access the details through your state treasurer's office.

Tip #2: The Early Bird Gets The Worm.
There is no substitute for time and the power of compound returns, and it's easier than you think to get started. "Consider giving up an immediate pleasure today for the gift of education down the road," he says. "Instead of going out to a fancy restaurant for dinner twice a month, put that $200 into a 529 college savings plan. Believe it or not, a $207 hypothetical monthly investment for 18 years at an 8% annual return could potentially net as much as $100,000 toward a college education."

Tip #3: Consistency is Key.
"Set a plan and stick with it through regular monthly deposits. Get into the habit of regular saving first, and then you can increase the amount over time. Just get started! If you have trouble finding room in your budget for a regular investment, think about other ways to find the money.," Diehl explains.

For example, if your child goes from daycare into grammar school, why not put that money into a regular 529 investment? Or, earmark a portion of your annual tax refund toward a 529 plan.

Tip #4: Make it an (Extended) Family Affair.
"Get your friends, family and the child's grandparents involved. At holidays and birthdays, ask for contributions toward a college fund instead of the latest toy," he recommends.

Tip #5: Ask a Professional.
Diehl notes that a college savings should be part of an overall financial plan, but there are many ways to approach it. "A professional financial advisor can help you develop a long-term plan to work toward your family's financial goals. He leads a team of advanced market specialists who help registered representatives market, set up and transfer qualified plans (i.e., IRA, SEP IRA, 401(k) and SIMPLE plans) and answer questions related to investments, trusts and estate planning," he says.

I Bonds, a type of savings bond that protects the purchasing power of individuals' investments while earning a real rate of return, are another option for saving for college. I Bonds are backed by the full faith and credit of the United States. "When parents purchase I Bonds to set up a college fund for their children's education, they are guaranteed to receive all of their principal back, plus interest," explains Kara Beigay, Senior Account Executive, Euro RSCG Magnet, Washington, DC.

The Treasury's "Education Bond Program" allows interest on I Bonds to be completely or partially excluded from federal income tax when the bond owner pays tuition and other fees in the same calendar year the bonds are redeemed. More information see www.savingsbonds.gov/sav/saveduca.htm#expenses

"Now, parents can purchase these I Bonds online through TreasuryDirect (www.treasurydirect.gov) by transferring funds from their savings or checking account. The process to open an account to buy I Bonds takes just minutes, and the bonds can be purchased in penny increments from $25 up to $30,000 each year. Individuals can tailor their account to their needs, by adding to their TreasuryDirect account on a regular basis or making automatic deductions from the account to pay for college tuition," she says.

Think Retirement First
Getting started sounds simple, but parents should consider cleaning up their own finances before moving on to college savings. "Parents should take care of their own financial health before trying to save for college for their children. If parents have a lot of debt, it is not wise to divert money away from debt reduction for college savings," says Alisa LeSueur, Certified College Planning Specialist, with ICS College Funding, San Antonio, Texas.

"I see many parents trying to pay for college when their own finances are not in order. What this results in is parents who do not get to retire anywhere near their desired retirement age," she says.

Getting Started Today
A good resource for a quick education in college savings is the Financial Planning Association, the membership organization for the financial planning community with 28,500 members in 100 chapters across the country. Information can be found at www.FPAnet.org.

About the Author
Lisa B. Samalonis is a freelance writer from Sicklerville, NJ. Ms. Samalonis frequently writes on several topics including family, parenting, and health issues. She has written many articles for medical and trade magazines, and newspapers.

Reprinted by permission of Parents Express News Magazine
and L. Samalonis

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