Personal Finance and Investing

Paying for a college education may be the greatest gift you can give. However, it may also be the most costly. It is no secret that college expenses have been rising at an alarming rate. According to The College Board’s report, “Trends in College Pricing” tuition has increased at twice the rate of inflation over the past 20 years (2001). This means in another 18 years parents can anticipate paying approximately $115,000 for total expenses at a 4-year public college or about $250,000 at a private institution.

Here’s what you can do now to help with the rising costs of a higher education in the future—it’s called the 529 College Savings Plan. Named for a section of the Internal Revenue Code that permits very favorable tax treatment, this state sponsored college savings plan can be withdrawn completely tax-free if the money is spent on qualified educational costs.

Account owners can generally write-off up to $55,000 ($110,000 for married couples) per beneficiary once per five-year period without incurring a federal gift tax. For example, an affluent couple can potentially send their 4 grandchildren to college and immediately eliminate $440,000 (4 x $110,000) from their taxable estate.

Besides the tax incentives, there are some additional features that make 529s a logical choice for college funding. There are no age or income limitations and the contribution limits are high, some reaching $268,000. Account owners keep control of the assets. If, for any reason, the owner must close the account, a penalty of 10% will be assessed on the earnings and the balance may be used at the owner’s discretion. In addition, 529s offer the ability to change the plan’s beneficiary. So if little Johnny decides to skip college the account can be reassigned to his little sister. If she wins a scholarship, the money can even be withdrawn without a penalty.

Each state’s 529 plan has its own features and benefits. All state plans are not created equal; some state plans are better than others. (Be cautious, some state plans do not offer diversified portfolio options.) Fortunately, most state plans allow you to invest across state lines, meaning that if you don’t like the plan your state has to offer, you can look to other states and go with a plan that you’re comfortable with. Currently very few states offer tax breaks on their 529 plans, so investment selection and management experience should carry more weight when choosing a plan.

With a college savings plan, you may select investment options based upon your goals and time horizon. One of the more common investment choices is based on the current age of the beneficiary. Investment allocations will change over time, so that the older the child gets and the closer he/she gets to college age, the more conservative the underlying investments become.

Figuring out the various tradeoffs among the different plans can be quite confusing. No particular type of account or investment option is appropriate for every investor. Make sure you consult with a well-informed investment advisor prior to investing.

Robert Valentine is a well-known expert in the matters concerning investors. His popular 529
articles have been published by several publications throughout the United States. Please visit his website, http://www.themoneyalert.com to view his column.

If you are in college, about to go to college, or have children that will soon be in college, student loans should be on your mind.  Can you go to college without borrowing money, is it even possible? 

It is estimated that two-thirds of students borrow money during their four year degree at public institutions – with an estimated average debt of $23,000.  One in ten owes more than 44,000 bucks.  Private school numbers are, of course, higher.

I would argue that trying to avoid student loan debt in these precarious financial times would be well worth the sacrifice.

How can it be done?  Here are three secrets to nearly painless college savings:

Use tax advantaged savings plans such as 529-B’s and its numerous variations – which can vary state by state-and start early to reach your target. If you wait until the kid’s in Junior High to start saving will require higher monthly savings. Let Grandpa do it:  Savings bonds and similar birthday or holiday monetary gifts put into a college fund, makes way more sense than buying a toy or game that will be destroyed and forgotten by the end of the day.

In addition to parents saving for college, I think kids saving for their own college expenses will increase with the current economic challenges.  Working part-time in high school and during college, full time during summers and Christmas, can go a long way towards a student saving for their own annual college costs. 

 It will also decrease the tendency to slack off and party.  If it’s your own money you are blowing, the likelihood of focusing on your studies is much greater.  No, it is not your birthright to attend beer soaked frat parties.

Another common problem is misallocation of funds.  No, I don’t mean somebody stealing your money, but rather, having priorities screwed up.

Why is Junior driving a $25,000 dollar car with the parents paying monthly car payments, with a boat, jet ski or four-wheeler in the yard, but the parents whining “I have no money at the end of the month to save toward college.”

If at the end of the day, however, college rolls around and there are limited funds in the bank, what do you do?

Take all opportunities to identify FREE money.  Scholarships, grants, military commitments, are available-with a little digging.  Check out http://edu.fastweb.com/v/o_registration/flow/step1 Once free money is used up or is not an option, then filling out a FAFSA form  (www.fafsa.ed.gov) at the college financial aid office and discussing your options with them is the next step. Make sure you learn the difference between direct federal loans such as Perkins which have extremely low interest rates and Stafford programs.  With Stafford, find out if you qualify for subsidized loans, which means the feds pay all interest costs while you are in school and during the deferment time frame. School financial aid officers are your best friend – suck up to them, take them chocolates, and mow their yard (just kidding, but I think you get the picture). Make sure you understand the loan limits per year, and have a plan for what to do for the difference. Understand your rights associated with illness and financial hardship during your loan repayment period. Remember, you must be in school at least ½ time to full time to qualify for federal loans.  Don’t drop too many classes. Keep all your paperwork in organized files, because the piper will have to be paid at the end of your education-trying to find what and who you owe may be difficult after moving from dorm to apartment to frat house,  or back to Mom and Dad’s, because you don’t have a job.

Repayment options are beyond the scope of this article, and congress is considering major changes this year in the college loan arena, so keep your eyes and ears open. A great website for student loan information is http://www.finaid.org/loans/ .   

Just keep in mind that government loans can be great because of lower interest rates and more lenient payment plans.  But the government also has enormous power when it comes to collecting on your student loan debt.  Consider the seizing of your tax refunds, denial of new loans, wage garnishment without going to court, taking part of your social security check and large collection fees as just a few of their tools.  Also there is no statute of limitations, if they find you on Tahiti 15 years from now, tough; your behind is theirs, as they say….

Private loans are still available, but much harder to come by with current credit limitations that are increasing daily.  Your FICO score better be good (>700) and you must be up to date with all your payments.

So in summary, the best loan for college is the one with a balance of ZERO.  If you must borrow, plan wisely.  You don’t want to be paying Sallie Mae your last college loan payment when you are getting ready for that first Social Security check.

Dr. Dean is an established and successful OBGYN, and professional author. He can be reached at Info@TheMillionaireNurse.com or 229.220.0339 http://www.themillionairenurse.com