gotta plan?

story by | ryan keel

As you cradle that bundle of joy in the hospital room, you dream of this baby’s future. Everyone will describe him as well liked, polite, ambitious, a real go getter. He’ll be homecoming king, get straight A’s, be captain of the basketball team and go to…college? Well, of course he’ll go to college, right? But how will he PAY for college?

You've probably read magazine articles or heard talk about how expensive it is to attend college these days... and how quickly the cost is rising! You may have also heard some of the horror stories of recent graduates who are so far in debt they can't make the minimum payments on their student loans. According to the College Board [a non-profit organization], the average cost for tuition and fees in 2010 looked like this:

• Public four-year colleges, $7,605 per year for in-state students and $11,990 for full-time out-of-state students

• Private nonprofit four-year colleges, $27,293 per year

• Public two-year colleges, $2,713 per year

Before you decide to cash in your 401[k] or sell a kidney, let’s look at some good news. Financial Aid is there to help offset a good portion of those costs. For the 2009-2010 school year the average amount of aid for a full-time undergraduate student was about $11,500, including more than $6,000 in grants, which may not have to be repaid1. Good news, yes! But even so, you or your child can be left with a substantial bill.

When I meet with parents to discuss a college plan, I always start the conversation the same way, “If you aren't currently maxing out your retirement contributions [IRA, 401(k) etc.], DO NOT start putting money away for college.” As you can imagine, I get some funny looks, but once I explain my reasoning, most parents agree; you can take out loans for college, but you can't for retirement. Fairly simple, but to the point. With a solid understanding of your financial situation and how the college process works, it's possible to fund your retirement AND help pay for college.

Investing Options

Whether you are investing for college, retirement or even a family trip to Disneyland, the general rule of thumb is the more time you have until the money is needed, the more risk you can afford to take. If your child is 10-15 years away from college, you may want to have the majority of your investments in equities. If your time frame is much shorter, say only a few years, you may want to look at fixed income or similar low risk investments. The theory is that with longer time frames, you can afford to ride out the ups and downs of the market. Here are some common investment options for saving for college:

Coverdell Education Savings Accounts

[CESA] This trust or custodial account is created for the purpose of paying the qualified education expenses of the beneficiary. Think of them as a mini-IRA, an empty box that you can invest in any stock, bond or mutual fund that you prefer. You can contribute $2,000/year and the earnings grow tax-deferred and tax-free if used for qualified expenses, but there is no tax deduction for contributions. Contributions can also be made by companies or organizations, which can be helpful if you are a small business owner.

529 Plans This program is set up to allow a person to either prepay tuition or contribute to an account established for paying a student's qualified education expenses at an eligible educational institution. You invest after tax dollars into your choice of several investment options that are available inside the 529 plan through various states. Currently I'm not recommending any prepaid plans to my clients. Several states have run into trouble with investment returns being too low and college costs rising too quickly, that they are cutting some of the benefits. The College Savings Plan, where you contribute money, on the other hand is still a viable option.

Most 529 Plans have age based portfolios that are more heavily invested in equities when the child is younger and automatically scale more into fixed income as the student gets closer to college. Currently there are no standards for age based investments like these. One plan’s investment allocation for a 10-year-old could be very different from another plan’s.

An advantage of using a 529 Plan from your home state is that most offer an in-state tax deduction for residents. So when choosing a 529 Plan, be sure you are aware of any state tax deduction as well as investment options, fees and expenses and any restrictions on making changes. These plans have become very popular over the last several years, partially due to the fact that they were created to address the specific need of saving for college and also because they are what I consider a bit of a 'trendy' product. They have received an incredible amount of publicity from magazines and online websites as a one stop solution for saving for college. While they can play an important role in any plan, they are not usually my first choice.

IRAs With their tax deferred growth, IRAs are designed for retirement, but they also offer penalty free withdrawals if the money is used for qualified higher education expenses. You should be aware that withdrawals are taxed as ordinary income and count against any financial aid for the next school year. You may want to consult your tax professional. Also, you do need to have earned income to be eligible to contribute to an IRA. Luckily, I'm sure your son or daughter can't wait to get out there and start that summer job!

There are literally thousands of other investment options to choose from, such as individual stocks, mutual funds, bonds and CD's. The best one really depends on your personal situation. When making any decision it's important to understand exactly what it is you're buying, if there are any fees and expenses and the fact that different strategies can also affect your student’s Financial Aid in different ways, either positively or negatively.

Financial Aid Help

Regardless if you have been saving for college or not, applying for Financial Aid is something every student should do. Financial Aid starts with the Expected Family Contribution [EFC], which is how much a family is expected to contribute to the total cost of college for that singular year. It is computed by using family financial data submitted on Financial Aid application forms. Factors such as family size and number of family members in college also affect your EFC. Typically the lower your EFC, the more financial aid you receive. It's important to understand how this works as certain items can count against Financial Aid more than others. As an example, $1,000 in a mutual fund in the student’s name will count more against Financial Aid than the $1,000 of the same mutual fund in the parent’s name. It is details such as this that make planning for college so important. Even small mistakes can have a big impact. Your student’s Financial Aid package is also affected by their GPA, class ranking and ACT/SAT scores.

Often grandparents [or other relatives] like to help out with the cost of college. I think this is a great way

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701.271.1810

Providing to help the student as well as offer some estate tax benefits for the grandparents. There are however some pitfalls to be aware of. If a grandparent were to pay for the tuition directly to the college, it will count dollar for dollar against any Financial Aid the student would receive for that year. It’s another case of knowing how the process works and finding the right strategy to fit the situation. One simple idea that works in some situations is to not pay for the tuition. Instead, set aside the desired amount you wanted to contribute and help pay off student loans after graduation. It won't adversely affect Financial Aid and at the same time it offers incentive for the student to graduate.

School Options

When it comes time to choose the schools you want to apply to, don't rule out any on cost alone. Private colleges may be significantly more expensive at first glance, but they do have advantages. Generally speaking, private colleges will offer a larger percentage of their Financial Aid packages in the form of grants rather than loans. Grants are free money that do not need to be repaid. Private colleges are also geared more towards graduating in four years compared to public colleges. Graduating in four years from a private college can be cheaper than six years at a public school.

I've touched on just a few main points, but as you can see there are many details to take into consideration when putting together a College Plan. If you are a 'do-it-yourselfer,' there are several books to help you such as Paying For College Without Going Broke by The Princeton Review. If you're looking for some help from an advisor, do your homework. The internet is full of people who call themselves 'College Planners,' but too often they have a specific product they'd like to sell you. I'd suggest making sure they have a Certified College Planning Specialist [CCPS] designation then you know they have the educational background to help you. College is an important stepping stone into the real word and you can help your children pay for college. But don’t wait. Get informed and start your College Plan today!

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