INVESTMENT OUTLOOK : BEYOND THE TRADITIONAL : How to Afford a Private School Education : Saving, Planning Early Can Help Ease High Costs
By now, most parents are inured to the expense of college for their children, though the average costs are still startling to the uninitiated--$6,954 a year at public universities nationwide, including room and board, and $13,997 at private schools.
But for parents who choose to send their children to private elementary and high schools because of concerns about the quality of public schools or for religious reasons, the costs are just as appalling. And they are right around the corner.
A parent has only five years between a child’s birth and the start of school to get prepared. With private school costing an average of $6,000 a year in Southern California, a well-planned approach to saving is the only way to meet this expensive commitment.
“There is no magic wand,” says Stephen T. Mellinger, general agent for Northwestern Mutual Life, Los Angeles. “There is a lot of mythology about the instrument (of savings), but the real key is that you have to get enough saved on an annual basis.”
Financial advisers suggest that you start preparing for your children’s schooling as early as possible; some say planning before a baby is born is not too soon. Consider saving for the entire family first, and then begin to put together an adequate school fund.
A little basic math is in order: Let’s assume that you will need $6,000 a year beginning when your newborn child turns 6 to meet the costs of the first 12 grades and to prepare for college. You need to save $6,000 a year from now until your child graduates from high school. If you maintain that pace, the savings plus the interest you earn will pay for elementary and high school, and you’ll have a head start on college funds.
Donna and Peter Munson of Santa Monica, the parents of Elizabeth, 2 1/2, and Michelle, 6 months, have discovered that expenses start long before kindergarten. “Preschool is costing us $500 for a semester for Elizabeth,” Donna Munson says. “When you have a second one, that’s $1,000 for a semester. . . . Then, if you work and still have to have a baby sitter, that’s even more.”
The Munsons have already begun putting their children’s names on lists for private schools in their neighborhood. And they have begun shelling out money for applications, in some cases as much as $100--and that doesn’t ensure acceptance. “It’s depressing,” Donna Munson says.
Experts add that few parents allot enough to savings.
“People just don’t focus on how much after-tax money it’s going to take,” says Adriane G. Berg, chairwoman of the New York State Bar Assn. and author of “How to Stop Fighting About Money and Make Some.” Tuition for private schools is not tax-deductible.
Donna Munson says she is considering public school but is dismayed by the large class size and worried about the quality of the schooling.
A child’s education sometimes isn’t the family’s only concern.
“Often, you’re going to have to make some tough decisions about life style, because there aren’t any shortcuts. After you get past the ‘oh, my gosh’ gap, when you realize that you have to come up with $500 to $600 after tax to make it, then you can figure out how you’re going to do it,” Mellinger says.
Keep in mind that you must still provide for other family emergencies and savings on top of those sums. “Parents’ financial security must come first,” says Edward R. London, partner in the Los Angeles office of Urbach Kahn & Werlin, an accounting firm. “Don’t save for your children and bankrupt yourself.”
He suggests putting a minimum of 25% of your annual living costs in an accessible savings account. “We don’t let the tax tail wag the dog, and we don’t live to finance the children,” London says.
Here is what the experts advise to help you pay for the costs of your children’s private education:
* Pay yourself first. “Ten percent out of every paycheck should go to savings for the whole family,” London says. Of that, try to put half in an emergency account and half in an investment fund. When the emergency account is adequate, put the entire amount toward investment and growth.
* Consider zero-coupon municipal bonds. These can be ideal for helping pay for elementary education because you can purchase almost any maturity you need. For example, you could stagger the maturities to coincide with the annual dates on which tuition will be due.
Choose double-tax-exempt bonds, so you pay neither federal nor state tax.
With a zero-coupon bond, the principal is discounted for the amount of interest to be earned. For instance, you may pay about $4,000 for a 10-year bond that will be worth $10,000 on maturity. No money is available until the bond matures, but you can sell the bonds on the open market. The value of these bonds can sometimes fluctuate wildly; investigate the issuer, find the rating on the bond and see if the bond is insured. Your financial adviser should be able to help uncover these facts. Like any bond, zero coupons can also be redeemed by the issuer before maturity, or “called.”
* Select a couple of mutual funds in which to invest. You might divide your money between municipal bond funds and equity funds. To avoid paying the so-called kiddie tax, invest only enough to generate up to $1,000 a year in interest in your child’s name (he’ll pay no taxes on the first $500 and will pay only 15% of the second $500). Put yourself as the custodian on the account. Money in your child’s name that generates interest exceeding $1,000 is taxed at your maximum tax rate, up to 33%. So it makes more sense to keep that money in your name and most likely be taxed at a rate lower than your maximum rate.
After age 14, the kiddie tax is no longer applicable, so you can put all investments for your children in their names to take advantage of their lower tax rates. But be aware that once funds are the property of the child, only the child can revoke that ownership.
* Think about cash-value life insurance. Using a $100,000, traditional whole-life insurance policy as an example, you would have to pay premiums of $5,000 annually for four years to save $20,000. Then you can borrow against the $100,000 death benefit, reducing the proceeds your beneficiary will receive when you die by the $20,000 borrowed. But you will have no scheduled payments to make; you will only reduce the proceeds. You usually will not have to make monthly payments on the loan.
* Look into a home-equity line of credit. A lender gives you, in effect, a checkbook with most of your home’s equity as collateral. You can draw against this line of credit as you need it for tuition, rather than having to take your entire expenses in one lump sum. Interest you pay on home-equity loans is tax deductible, a real advantage, since private school tuition is not.
