With the cost of tuition and fees soaring, parents face a daunting task in trying to figure out how to finance their children's college educations.
The College Board, which tracks college pricing trends, reported earlier this week that tuition and fees at four-year public colleges rose more than 6 percent to an average of $5,836 this fall. The cost at private four-year colleges increased just under 6 percent to an average of $22,218.
"Those numbers are intimidating, but parents have to remember they don't have to pay it all up-front," said Bruce D. Harrington, vice president of Boston-based MFS Investment Management.
The typical family, he said, "pays for college in three different ways: one-third out of current income, one-third out of college savings, and one-third out of loans or grants."
Still, Harrington said, families will find it easier if they start saving sooner rather than later.
Among the most popular ways for families to save are the Section 529 plans, which are state-sponsored programs named for a section of the Internal Revenue Code. Money set aside in 529 plans grows tax-deferred, and distributions to pay for a beneficiary's college expenses are exempt from federal income taxes.
Joseph F. Hurley, president and chief executive of Savingforcollege.com, a college financing information center, pointed out that Congress earlier this year voted to extend the tax exempt status of 529 plans indefinitely rather than allowing it to "sunset" in 2010.
"That uncertainty is eliminated now, making 529 plans more attractive," he said.
In addition, a change in the tax law has made money invested in custodial accounts under the Uniform Gifts to Minors Act, UGMA, or Uniform Transfers to Minors Act, UTMA, more likely to be taxed at the parents' rate. This again makes the 529 plans a better savings alternative, Hurley said.
Harold Simansky, founder of Educational Investments LLC in Brookline, Mass., said he urges a multigenerational approach to financing college educations.
"The numbers are just too big for the parents to do it by themselves," he said. "And for grandparents, saving for a grandchild's education and paying for tuition has estate planning and gift tax planning benefits."
That's because tuition payments don't count against an individual's $12,000 a year gift-tax exclusion. Contributions of up to $12,000 to 529 accounts also qualify, and contributions of between $12,000 and $60,000 can be treated as if they were made over a five-year period for gift-tax purposes.
Although some families plan on tapping home equity to cover college expenses, Simansky discourages it.
"If they tap into their homes to pay for education, what are they going to do in retirement?" he asks.
Jon Veenis, executive vice president for San Francisco-based Wells Fargo & Co., said he urges families to "pursue the least-costly money first."
That means to start by looking for "free" money such as scholarship and grants, then looking at government-guaranteed loans such as the Stafford for students or the PLUS for parents.
Veenis said families that need additional financing then can look at private loans, such as those issued through the Wells Fargo student loan program, or home equity loans.
"The choice here depends on several considerations," he said. "A key question is, who is going to be obligated for the debt? Is it going to be the parents, the student, or some combination? That could drive the decision."
Harrington of MFS Investment Management, which operates an Oregon-sponsored 529 plan, suggests families can accumulate more if they set up a systematic savings plan.
"If you put away just $50 a month and make it automatic, over 18 years it will give you about $18,000, assuming a 6 percent growth rate," he said. "If you can set aside $100 a month, you'll accumulate even more."
Harrington, the father of three young sons, also believes children should be saving for their own college educations by putting aside gift money or earnings from summer jobs.
"It gives them some sense of responsibility, of being part of the process," he said.