Saving for college times two

Every parent wants to best for their children and for many that means paying for college. How can you afford to send twins or multiples to college?

Did you know that college costs this year (2007-08) are up an average of 6.5 percent over last year? Private four-year costs are at an average of $23,712, while public four-year is at about $6,185. Oh but wait! We aren’t average parents are we? No, we are parents of twins or multiples (multiply costs accordingly)! The cost of sending your children to college will continue to rise on a yearly basis.

The cost of college is expected to cost in excess of $100,000 for public school and over $200,000 for private school. Double that for us parents of twins and multiply for you lucky parents of multiples.

College as an investment

Once you as parents have decided you want to pay for part or all of your children’s college education you will need to decide how you plan to pull it off. After learning the costs, you might also feel a little (or a lot) discouraged at the prospect of having to come up with what amounts to a small fortune. This is why having the right prospective will help when it comes to saving for college.

Sending your children to college is not just about giving them a gift or helping them with a onetime financial obligation. Rather, it is about investing in the future. The level of education your children receive will most likely have a direct impact on their future earning potential. Understanding that saving for your children’s college education is more of an investment than an expense might help when deciding what sacrifices you may need to make to afford it.

Savings plans

As with any investment, seek advice from a professional financial advisor before making any decisions as to which plan, if any is right for you. Here are a few savings plans and investment opportunities to help parents save for their children’s college costs.

  • Section 529 College Savings Plans – There are two types of 529 plans. The first allows you to purchase tuition credits at today’s rates which can be used in the future. The second is a savings plan that allows you to invest in mutual funds with very beneficial tax breaks.  Specifically, the money you put into a 529 savings plan will grow tax-deferred and distributions to pay college costs are tax-free.
  • Coverdell Education Savings Account – Formally known as The Education IRA, a Coverdell Education Savings Account allows for a maximum annual contribution of $2,000 per student. The earnings grow tax-free so long as the distributions are used for college expenses.
  • Roth IRA Account – If you, the parents will be at least 59 ½ years old when your kids are in college a Roth IRA is something to consider. You can invest up to $4,000 a year in a Roth IRA, twice as much as a Coverdell Education Savings Account.

College tax credits

Once your children are grown and are attending college, there are two options which can provide you with tax breaks. Talk to your financial advisor to find out about the income restrictions that apply to each of these tax credits.

  • Hope Scholarship – Families can receive a tax credit of up to $1,500 per year for the first two years of college. Income restrictions do apply for this tax credit.
  • Lifetime Learning Credit – Families can receive a $2,000 tax credit for third year of college and beyond. The Lifetime Learning Credit is per family, not per student. The same income restrictions apply as with the Hope Scholarship.

Saving for retirement vs. saving for college

Let’s face it, sometimes there just isn’t enough money to spread around. When it comes to deciding whether to fund your retirement accounts or to save for your children’s college education what should you do?

It generally makes more sense to focus on your retirement accounts first. In the end, your children can get scholarships and take out student loans to get through college. You don’t have that luxury when it comes to retirement. It is also important to mention that you should never borrow from your 401K to pay for college. You funded that 401K with pre-tax dollars and you will have to pay it back with after tax dollars. This can end up cost you 33% more in the end.