And baby makes 529?

Healthy finances -April 2005


Susan Beacham


Childhood goes by so fast. One day you’re reveling in your baby’s first step, the next you’re sending him off to college.

It goes just about that fast, so it’s important to take a few minutes along the way to figure out how you’ll pay that first tuition bill. 

All is not lost if you have not started saving toward your children’s college education by the time they begin to cut their teeth. But, it is a problem if they are in elementary school and you still have no plan.

Let’s review the cost of college.

It’s a lot.

OK, review done.

Next question, how to tackle “a lot”? Answer: The old-fashioned way—set a goal, save toward that goal and invest wisely.

Here are the three questions I considered when I began looking at college funding for our girls:

1. How much will a college education likely cost for a child born today?

If you give birth to a child today and that child attends a four-year public college somewhere in the Midwest 18 years from now, the cost is estimated at $101,400 for an in-state school and $160,000 for an out-of-state school. If your child wants a private school, expect to pay $212,100, according to The College Board’s 2003-04 Annual Survey of Colleges.

If you already have children, go to to find out how much you may be paying when the time comes.

2. How much will I need to save to pay that tuition bill?

Go to and go to the savings calculator, under the “College Planning Resources” tab. Click on the “Tuition Search” tab within the calculator to get an idea of the cost of tuition at a specific university.

Armed with that information, this calculator spells out exactly how much you need to save each month, starting today.  

3. How do I invest the money I save so that it grows?

There are many options:

n 529 plans offer the best tax breaks (guaranteed by Congress only through 2010), allow parents to retain control of the fund and allow you to contribute up to $230,000. Once you choose the plan, there are no further investment decisions to make. Each state offers a 529 plan. Illinois’ Bright Start Illinois program includes a state tax deduction of up to $10,000 for 2005 contributions. 

n 2503(c) trusts, also called “gift to minors trusts,” allow parents, grandparents and others to give up to $10,000 a year without incurring a gift tax. The downside: The money belongs to the child once he turns 21.

n Uniform Gift to Minors Accounts have no investment limits and the first $700 of income each year is tax free. The downside: The money belongs to the child and, once he turns 18, you have no more control over the account. And, it could lesson your child’s chances of getting financial aid.

n Coverdell Educational Savings, originally known as education IRAs, work much like Roth IRAs—the annual contribution limit is $2,000 per year per child, contributions are not tax deductible and the earnings grow tax free. Two big advantages: Anyone can open an account for a child, provided the total of all contributions within a year does not exceed $2,000, and the proceeds can be used to cover expenses for kindergarten through high school as well as college.

Coverdell accounts are the choice of Wayne Janus, a grandfather and founding partner of JMG Financial in Oak Brook who has been advising families on this issue for more than 30 years.

Regardless of the savings vehicle you choose, Janus says, “When the children are very young, their college money should be invested primarily or even exclusively in stocks or stock mutual funds. The volatility of the stock market would be offset by time.”

As college grows closer, he recommends transferring the money into safer, more stable investments such as certificates of deposit or treasury bonds.

Finally, it is possible your child will win a scholarship or qualify for financial aid, but don’t count on anything other than you, your child and your own ability to pay out of pocket for the cost of a four-year college education. The tools available online today can help you “what-if” yourself into a comfortable, yet solid plan that will help you be prepared for the future. 

My daughters, Allison and Amanda, tell us they have every intention of going to college. Allison has her sights set on Northwestern University and Amanda still is weighing her options. I remind them they will be helping pay for college—a piece of every gift goes into the college accounts and once they are old enough to have part-time or summer jobs, some of their wages will go into their college accounts.

Asking children to help pay for college is a way to help them take personal responsibility for their future—starting with the cost of preparing for that future.

Susan Beacham is the founder and CEO of Money Savvy Generation, a financial education company that provides innovative products and services to help parents and educators teach children the skills of basic personal finance, E-mail her at

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