College costs
For the 2006/2007 college year, the annual cost of attendance (known as the COA figure) for four-year public colleges is $16,357 and for four-year private colleges, $33,301. The COA figure includes tuition and fees, room and board, books and supplies, transportation, and personal expenses. (Source: The College Board's 2006 Trends in College Pricing Report.)

The trend of annual college costs outpacing inflation is expected to continue. There are many reasons why colleges find it difficult to hold down price increases from year to year. The main factors are continually increasing salary, maintenance, energy, technology, and recruiting costs, along with the goal of providing students with more sophisticated dormitories, dining halls, recreation and health care facilities, career centers, and campus security.

College savings options
It is important for parents to start putting money aside for college as early as possible. But where...and how? There are many possibilities, each with varied features. For example, some options offer tax advantages, some are more costly to establish, some charge management fees, some require parental income to be below a certain level, and some impose penalties if the money is not used for college.

Here is a brief list of options (which a qualified financial adviser can assist you in selecting).

• 529 college savings plans
• Coverdell education savings accounts
• Custodial accounts (UGMA/UTMA)
• Series EE bonds
• Traditional IRAs and Roth IRAs
• Employer-sponsored retirement plans
• Employee stock purchase plans
• Options unique to business owners
  

There are several factors to considering options:

Tax advantages
Money saved for college goes a lot further when it's allowed to accumulate tax free or tax deferred. To come out ahead in the college savings game, it's wise to consider tax-advantaged strategies.

Kiddie tax
Many parents believe they can shift assets to their child in order to avoid high income taxes. This strategy works best if the child is age 18 or older. If the child is under age 18, the kiddie tax rules apply.

Financial aid
Whether or not a child will qualify for financial aid (e.g., loan, grant, scholarship, or work-study) may affect parental savings decisions. The majority of financial aid is need-based, meaning that it's based on a family's ability to pay.

Predicting whether a child will qualify for financial aid many years down the road is an inexact science. Some families with incomes of $100,000 or more may qualify for aid, while those with lesser incomes may not. Income is only one of the factors used to determine financial aid eligibility. Other factors include amount of assets, family size, number of household members in college at the same time, and the existence of any special personal or financial circumstances.

If a child is expected to qualify for financial aid (and most do), parents should be aware of the formula the federal government uses to calculate aid--called the federal methodology--because there can be a financial aid impact on long-term savings decisions. The more money a family is expected to contribute to college costs, the less financial aid a child will be eligible for.

Time frame
Is the child in preschool or a freshman in high school? Obviously, most college savings strategies work best when the child is many years away from college. With a longer time horizon, parents can be more aggressive in their investments and have more years to take advantage of compounding.

When the child is a toddler up until about middle school (sixth grade or so), we typically recommend putting more money into equity investments because historically, over the long term, equities have provided higher returns than other types of investments (though past performance is no guarantee of future results). Then, as the child moves from middle school to high school, it's usually wise for parents to start shifting a portion of their equities toward shorter-term, fixed income investments.

If the time frame is only a few years, parents will be limited in their choice of appropriate strategies. For example, if the child were in high school, equities normally would not be a preferred strategy due to the short-term volatility of these investments. Similarly, parents would not have enough time to build up cash value in a life insurance policy.

Amount of money available to invest
The amount of money parents have to invest at a particular time might affect their savings strategies. For example, if parents have only a small amount of money to invest, trusts probably aren't the best option because they are typically more costly to establish and maintain than other college saving options. In this case, a Coverdell ESA may be more appropriate.
Control issues

Generally, when parents give money or property to their child, they lose control of those assets. Such a loss of parental ownership can take place immediately, as in the case of an outright gift of stock certificates, or it may be delayed, as in the case of a custodial account or trust. In any event, parents must assess their personal feelings about relinquishing control of assets to their child. Some children may not be mature enough to handle such assets, whereas others can be counted on to use them for college costs.

Discussing a college funding plan with your child
As college expenses continue to rise relative to the means of the average family to pay such costs in full, parents may find it helpful to sit down with their older children and discuss ways to pay for college. For example, parents may want to discuss:

• Whether they intend to fund 100 percent of college costs or whether they expect their child to contribute and, if so, in what amount. For example, parents might convey their expectation that their child contribute a certain percentage of all earnings from a part-time job or a portion of all gifts.
• Whether the child will play a role in the savings strategy. For example, parents who want to gift appreciated stock to their child should convey their expectation that the child will apply all of the gains to college costs.
• Whether any money will need to be borrowed, and if so, how much and in whose name the loan(s) will be obtained. The amount that needs to be borrowed may affect the type of college the child applies to (e.g., public or private, top tier or middle tier).
• Whether there will need to be shared financial responsibility during the college years. For example, the child may need to participate in a work-study program or obtain outside work during the college years.

Communicating these expectations ahead of time can prevent unpleasant surprises and help parents and their children better plan for the expenses that lie ahead. Also, an open discussion can give children an increased awareness of the financial burden their parents may be undertaking on their behalf.

Dilemma of saving for college and retirement
For many parents, especially those who started families in their 30s and 40s, the problem of saving for college and retirement at the same time is a nagging reality. At Lightship Mutual, we generally place retirement planning ahead of college planning for the simple fact that parents have no alternative-financing options for their retirement. On the other hand, their children can potentially earn scholarships, grants, and even take out student loans to self-finance their education.

If saving for both goals is a priority to the client, then we emphasize determining specific time frames and liquidity needs for each goal. This process can be daunting for individuals and typically becomes more manageable with the assistance of a financial planner.