College Savings Plan In North Carolina
According to the U.S. Census Bureau, those with a bachelor’s degree will earn nearly twice as much over the course of their lifetime as those who only have a high school diploma. Unfortunately, college doesn’t come cheap. Newsweek reports that college costs, averaged for public and private universities, now constitute 40 percent of the U.S. median household income (using 2012 data)
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The Cost of College
According to the College Board, the total cost of a four-year, public institution for an in-state student is about $39,880; for an out-of-state student it was $102,480, and for a private institution it was $138,960. These numbers can give you a rough estimate of the maximum you would have to pay per year. However, we should also take into consideration the inflation rate and age of our child. Once you have a general idea of college costs, we can figure out the right college savings plan for your family.
How many children do you have?
Will they be in college at the same time?
Is your family likely to qualify for financial aid?
Do your children have exceptional academic, athletic or other skills that will likely garner them scholarships?
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Options for college savings
There are a variety of ways to plan for your child’s education. Here are a couple of options:
Qualified tuition programs. Also known as 529 plans, qualified tuition programs allow you a space for tax-free investment growth, provided funds are used for education. Prepaid tuition plans are another option offered by qualified tuition programs, allowing you to pay tomorrow’s tuition bill at today’s prices.
Savings/checking account. It always helps to keep some extra money in the bank, but you will likely want to use another form of savings also, as these options provide little room for growth.
Investments. You can allocate a portion of your portfolio to college costs, but keep in mind that you will likely want to make your investments more conservative as your child reaches college age.
Retirement accounts. Retirement accounts may be attractive as college savings vehicles because they aren’t counted as assets for the federal financial aid calculation. However, retirement should almost always be prioritized ahead of college expenses, since your children may be able to receive loans or scholarships for college, which don’t exist to help you pay for retirement. Also, keep in mind that, depending on the type of retirement account you have, you may face taxes on withdrawals.
Coverdell accounts. Coverdell accounts are another type of account that allow tax-free growth for education expenses. However, they have a contribution limit of $2,000 per year, so you will likely need another form of savings to reach your goal.
Custodial accounts. Custodial accounts help you store money at your child’s tax rate rather than your own, up to a certain limit, which changes each year. While the custodian (you) controls the account and manages its investments, the beneficiary (your child) is the one who owns the assets, although he or she will not be able to access them until reaching age 18-21 (based on state of residency).
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If you’re looking to set up a college savings plan for your child or are confused on where to start, we’d be happy to help.