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Find answers to some of the basic questions on saving for college.
Why is it important to save for college expenses?
Today, there are more reasons than ever before to put money aside in an account with growth potential:
- A four-year college education can cost well over $130,000 today.
- At highly selective colleges and universities, just one year of tuition, room and board can top $40,000.
- Historically, college costs have risen at a rate exceeding the pace of inflation. (Source: The College Board, 2006 Trends in College Pricing.)
- Between 1972 and 2000, the percentage of high school graduates going on to college increased from 49% to 62%. (Source: US Dept. of Commerce, Bureau of the Census)
The best reasons to save, of course, are your children, since higher education can provide opportunities and earning potential far beyond those available to high school graduates.
How do people pay for college?
According to the US Department of Education, families with children in college today rely primarily on the following three sources to pay for college expenses:
- Personal savings
- Current income, and
- Loans
More than half of today's college students receive some form of financial aid, which comes in the form of:
- Grants and scholarships: Tuition, fee, and/or expense payments based on academic or athletic achievement or on need. Federal grant programs include Pell Grants and Federal Supplemental Educational Opportunity Grants.
- Work-study: Programs under which students can incorporate paying jobs with their academic studies. Programs vary greatly and are offered by many entities: colleges and universities, the federal government and some state governments, etc.
- Loans to students and/or parents: Loans represented more than 56% of financial aid in 2005-2006.
Note that the federal student loan interest deduction provision allows an above-the-line deduction for interest paid in the first 60 months of repayment on private or government-backed loans for post-secondary expenses for tuition, fees, books, equipment, room, and board. (You do not need to itemize in order to claim the deduction, whose maximum is now $2,500. Income restrictions apply.)
Hope Scholarship Credit
As a student in the first two years of college (or other eligible post-secondary training), you are eligible for a tax credit equal to 100% of the first $1,100 of tuition and fees and 50% of the second $1,100 (the amounts are indexed for inflation). This credit is available for each student's net tuition and fees (less grant aid) paid for college enrollment after December 31, 1997. (The credit is phased out for joint filers with income between $90,000 and $110,000 and for single filers with income between $45,000 and $55,000 (also indexed for inflation). The credit can be claimed in two taxable years (but not beyond the year when the student completes the first two years of college) for any person enrolled on at least a half-time basis for any portion of the year.
Lifetime Learning Credit
For college juniors and seniors, graduate students, and working people upgrading skills, there is a 20% tax credit for the first $10,000 of net tuition and fees paid for post-secondary enrollment after June 30, 1998. The credit is available on a per-family basis, and is phased out at the same income levels as the HOPE Scholarship(see above).
How much will you need to save?
Each person who is saving for a child's education has unique needs and resources, so there's no one-amount-fits-all answer. That's why Calvert offers the College Savings Calculator, an interactive online tool. You can project costs for one or more children, using different assumptions for variables such as investment return, education-cost inflation, amounts saved, etc. To determine how much you might need to save, use the College Saving Calculator, then do more detailed planning with your financial advisor.
How can you save enough?
Recent changes in the US tax law make it easier, and more advantageous from a tax perspective, to save for college. Tax-deferred or tax-free compounding of assets in a college savings account can be a powerful tool to help you save the money you'll need to fund all or part of a child's education.
| The Value of Starting Early |
| The sooner you start saving for a child's education, the more you can rely on savings in a tax-deferred or tax-free investment to help: |
| Average Annual Investment Return |
8% |
| Annual Tax-Deferred Contribution |
$2,000 |
$3,500 |
| Age of Child at First Contribution |
1 |
7 |
1 |
7 |
| Account Value When Child Reaches Age 18 |
$80,893 |
$40,991 |
$141,562 |
$67,956 |
What's the best account type to use?
Products offering tax-advantaged saving specifically for education are the 529 Savings Plan and the Coverdell Education Savings Account. Assets in some other tax-advantaged accounts may be used for education without penalty. These include the UGMA/UTMA custodial account and Roth IRA.
Assets from a Traditional or Rollover IRA may also be used without penalty for qualified education costs, though income taxes will most likely apply to distributions.
The advantage of saving in a tax-deferred account
Over time, saving in a tax-deferred account can prove significantly more beneficial than saving in a taxable account.
Assuming an 8% rate of return, a combined federal and state tax rate of 28.5% for the taxable account, an initial contribution of $1,500, and a monthly contribution of $250 each month for 17 years, the difference between saving in a tax-deferred account and a taxable account could be $22,372:
|
Tax-Deferred Saving |
Taxable Saving |
| Initial Contribution |
$1,500 |
$1,500 |
| Monthly Contribution |
$250 |
$250 |
| Average Annual Return |
8% |
8% |
| Federal/state Tax Rate |
N/A |
28.5% |
| Account Balance After 17 Years |
$110,462 |
$88,090 |
Given the range of savings vehicles available, the decision on which is best for you depends on your own situation and that of the person for whom you hope to save. It's a good idea to inform yourself about all of your choices.
If you have maxed out contribution opportunities or do not qualify to contribute to a tax-advantaged plan, you may want to consider investing for education in a taxable account using Calvert funds. Once you have a good understanding of the provisions governing the different account types, use the account comparison table to make side-by-side comparisons.
What is the benefit of saving in socially responsible investments?
You know that investing for college has to be about ''how much.'' You need to focus on accumulating the amount you'll need to fund all or part of a child's education. To do that you must focus on how much your money can earn. But paying attention to ''how much'' doesn't have to mean ignoring ''how well.'' After all, when the child you're educating goes out into the world, you want it to be a safe and healthy place to make a life.
Like saving for college, addressing social and environmental concerns can appear overwhelming. Fortunately, both can be effectively addressed in the same ways: don't ignore the challenge; don't put off the solution until it's too late; start now, even if you have to start small; every little bit will help you get one step closer.
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