“How Am I Going to Afford My Child’s Education?”

As Mary Johnson listened to her husband Bart read about rising college costs, her mood shifted from contentment to anxiety about the future. “How are we going to afford to send Emily to school?” Bart wondered aloud.

Scary Numbers
True, when it comes to college cost projections, the numbers are a bit scary. In recent years, college costs have been rising faster than the inflation rate, at about 4% to 6% per year. At that rate, a four-year degree for today’s newborn could top $100,000 at a public college — and more than $250,000 at a private college.

“We have to start an investment plan now,” said Mary. With 11 years until Emily enters college, the family has time to develop a solid investment plan.

Investing for the Future
They will begin by investing $100 a month in an aggressive investment mix, made up mostly of stock mutual funds. When Emily is about 12, they’ll cut down their stock investments and move a majority of their money into more conservative bond and money market funds. When Emily turns 15, they’ll shift everything into bond and money market funds to try to protect what they’ve saved while earning a moderate return.

However, that probably won’t be enough to meet their needs. So Bart and Mary will investigate other options as well.

Help Is Available
They could be in for a pleasant surprise. In addition to the traditional financial aid resources, the following options are now available —

• The Coverdell Education Savings Account (formerly known as the Education IRA), which allows qualified families to invest up to $2,000 per year, per child under age 18. Earnings accumulate tax free as long as the money is used for qualified education expenses.*
  
• The HOPE Credit, which allows qualified individuals to take a tax credit of up to $1,500 for education-related expenses during the first two years of postsecondary education.
  
• The Lifetime Learning Credit, which allows qualified individuals to take a tax credit of up to $2,000 in education expenses. (Note: Both the HOPE and Lifetime Learning Credit cannot be taken in the same tax year. Neither credit can be used in years when money is withdrawn from a Coverdell Education Savings Account.)

Also, Emily can take student loans, the interest on which is now tax deductible.

For More Help
If, like Bart and Mary, you find yourself wondering how you’ll afford your children’s education, start by investigating your options. For more information, consult the following organizations:

• The College Board — call your regional office or visit www.collegeboard.org
• FinAid — visit www.finaid.org
• U.S Department of Education, Federal Student Aid Information Center — call (800) 433-3243 or visit www.fafsa.ed.gov

*Nonqualified withdrawals are subject to regular income taxes and a 10% penalty.

©2004 Standard & Poor’s Financial Communications. All rights reserved.