Sunday, August 22, 2010

Honey-Do List for Financial Security Before Starting A Family

After five nights in the hospital, my husband and I bring home our first baby. We had dreamed of this day for the past couple years and had done lots of preparation and planning to get to this point. Much of the preparation included our finances, because as everyone knows and everyone warned us- babies are not cheap. Department of Agriculture estimated in 2008 that it cost 220,000 dollars to raise a child from birth to the age of 18, which does not include college tuition! In order to alleviate unneeded financial stress from our daily lives and be able to focus more on enjoying our future family we checked off our to-do list before having our first child:

Clear/Establish credit

In today’s society, you can’t get anything without decent credit. Or in some cases, if you’re lucky, they’ll give you what you want but make you pay up the wazoo for it. After tying the knot, we moved into our first “home” which consisted of expensive rent being flushed down the drain each month, but we lacked the credit to buy. In order to buy a house, we had to take care of my long list of medical bills that had racked up through my college years, thus clearing and establishing my credit.

My husband was learning a tough mistake of co-signing for an ex-girlfriend’s credit card. The fact that he had to file for bankruptcy at the age of twenty-three, and still had a higher credit score than me, was highly disturbing. He still had the black mark on his credit, but he had such great credit established previous to sharing a credit card with his ex that he still had a score in the 600’s with the bankruptcy mark. Credit is the most illogical thing I have encountered. Lesson to learn: NEVER co-sign with anyone on anything unless they are your spouse or child. Just don’t do it.

Set-up Retirement Savings

Once we had cleared my credit report, now we had to patiently sit and wait for my score to increase over time. In the meantime, we set up our retirement savings plan. The easiest place to start is to check out your work place. Many provide retirement options (ie: pensions, 401K’s, financial advisors for money markets and annuities). Find out what your company provides and take advantage of it. Remember to not put your eggs all in one basket. Have a couple different options set up to save for retirement. Then have it directly taken out of your paycheck so that you never even see it. Thakor refers to a simple formula for figuring how much retirement you need stashed away: take your annual income and multiply it by 25 to get a number to shoot for.

Buy a House

Time for all that hard work we did on my credit to pay off. With a decent credit score I can now make it through the strenuous loan application process, as well as get a good interest rate, which will save us substantial money over the long haul. My first word of advice here is to not buy the house of your dreams, but buy a smaller starter house first to gain some equity. Manisha Thakor, writing for, refers to the rule to remember when buying a house and asking yourself if you can afford it: You should not buy a house that is going to cost you more than 3x’s your annual income.

Build General Savings

For all of life’s unexpected quirks, have some funds set aside. We worked on this from day one, but this is a must to always keep an eye on.

Dependable Income

I teach, and being a special education teacher gives me a bit more job security than the rest. I also know there are a couple people below me on the seniority list for special education. After being caught in the unemployment statistics our first year of marriage my husband had found an hourly job at Wesco, one of the few companies who will pay for college. His job brings in some extra cash and is helping him to invest in his future, and did I mention for free?

Health Insurance

Kids get sick- a lot. I don’t have an impressive track record either when I talked about clearing my credit tarnished with unpaid medical bills. Good health insurance makes your paycheck worth that much more. There are many people out there who cannot get good insurance, and if that is the case at least have a plan (medical fund built up, Care Credit, payment plans, etc).
Once we had our to-do list checked off, enter baby. We had been patiently waiting to get our list completed, and were quite proud with ourselves that we had covered it in two years. Granted, we had a bit of a head start on things before meeting each other. But we wanted our family to be settled on a firm foundation. My husband and I both came from families where we saw our parents struggle from poor money management, which makes for a stressful marriage, feelings of guilt, and missed opportunities. We recognized these errors in our families and learned how to be financially responsible once we were out on our own. A couple times we had to learn the hard way, from mistakes, but one couldn’t ask for a better teacher than experience.

I look at my son as he lays sleeping in his bouncy chair. I want him to pursue everything he wants in life- travel, jump at opportunities that arise, take up a new sport or hobby, on top of learning the ethic of hard work and frugalness. Being financially stable provides much more flexibility and freedom to help these things happen.

Maybe someday he wants to be a neurosurgeon, a software programmer, or a teacher. Wait a minute- time to start a new honey-do list: Saving For College. The clock is ticking. But because we had gone through our to-do list for financial security before starting a family, we are now in a great position to start that college savings from the day he is born. I can’t think of a better gift to give my child- the assurance of higher education. As Edward Everett said, “Education is a better safeguard of liberty than a standing army.”

Have you passed the lessons of a personal financial hardship on to your children? Share your story with our readers.

Did you know can help you save more for college? Every dollar counts!

Saturday, August 21, 2010

Options for College Savings

I, like all other new parents, are a little overwhelmed when thinking of saving for college. Where do you start? What ways do I get the most interest? What are the benefits to certain programs? There are tax breaks out there too? Or maybe your kids are around the age of 9 or 10 and you’re halfway to the college milestone. You have been saving this whole time but haven’t looked at other options that may give you better benefits. Keep in mind the rule of 6% inflation each year. Here are your options when it comes to saving for college:

Number one recommendation for long-term savings: 529 Plans.

Each state has one, and you can shop around not having to reside in the state that holds your plan. Each state has a different plan, so you can pick one that has benefits you are more likely to use. The account owner can request withdrawal at anytime (subject to tax and a 10% penalty on earnings). 529’s also allow for third parties, such as grandparents to directly contribute. Many rewards programs are out there that give you free money based on your expenditures, and deposit that directly into your 529 Plan. Check out rewards such as Upromise, Futuretrust, and Fidelity 529 Rewards American Express Card which gives you 2% rebate on your purchases. Also note that 529 Plans are tax deferred.

Traditional Savings Accounts

Shop around, interest rates have dropped dramatically the past couple years. Often a savings account interest does not keep up with inflation. The upside is always having access to your cash.


Often times they earn more interest rate than a traditional savings account and have little to no risk as a savings. You just have to commit your money for so many years. Word of warning: be careful that taxes don’t eat up your interest rate in the end.

Stock Market

Best payout for interest if you are starting savings early, but many experts recommend switching to a less aggressive plan in the couple years approaching the college milestone. Cash out stocks and put them into bonds or a 529.

Savings Bonds

The U.S. Treasury recently announced new interest rates, and don’t forget that they compound yearly. For the Series I (one year commitment, renews automatically each year, collecting compound interest) interest is at 1.74%, and the Series EE is earning 1.44% (18 year commitment).

Mutual Funds (including money markets, stocks, bonds)

These are different than individual stocks, a portfolio of an assortment of bonds is put together to take advantage of the overall stock market with lower risk. However, your principal is not insured. Assets should be moved out of mutual funds and into a safer route when the time comes close to having to put that money to work paying for college.

The bottom line is to start saving early, with an aggressive plan. There is more risk, but also can be more gain. During your students’ high school career, switch your funds out of risky accounts and put them somewhere your money principal is guaranteed (savings, CD’s, 529 Plan). Consult a financial advisor to best advise you.

Are you saving for college with a 529 or using something else? Share your choice with our readers.

Did you know can help you save more for college? Every dollar counts!

Friday, August 20, 2010

When Cracking Open the College Savings - Get the Most Bang for Your Buck

Growing Job Fields

Yes, support Johnny in his aspirations when selecting a course of study, but also guide him in doing some research in his selected field. Find out what career choice he hopes to pursue with this degree, as well as some estimates of the average annual salary that comes with his career choice ( recommends a guideline of not taking out more student loans than your estimated annual salary after college). Is he ok with relocating if his field is more successful in certain locations, and is this career estimated to grow with society’s developing changes? These are tough questions to look at, but Johnny needs to look at these reality checks.

With being only four years out of college myself, I cannot tell you the number of my fellow classmates I saw graduate with a degree and not have a clue of what they were going to do with it. Nor did they look at statistics beforehand to see how well the field is growing, and now can’t get a job. If you’re not going to use your degree it is a waste of money and time flushed down the toilet. These are the people who complain they can’t get a job with a college degree. Know your statistics and do your research.

Packing up your student for dorm life in the next couple years? Money towards education would go the furthest if your student went into any of these following job fields that are just now taking off or are projected to be booming in the next few years. Your student would graduate with great odds of landing a job fresh out of college and would be making bucks that will make up for the time and money spent during those four years of college. analyzed data from the U.S. Department of Labor’s projection of job growth, and came up with the results of these growing job fields:
  • Science and Technology (field with the highest growth- a whopping 72%): meteorologist, computer software engineer, network architect, security system installers, plumbers.
  • Business and Finance: financial advisor (for everyday people) and financial analysts (for banks and companies), cost estimator for companies, and logisticians to manage supply chains.
  • Arts: technical writers, curators, film and video editors.
  • Medical: registered nurse, veterinarian, medical and public health social worker and jobs requiring less schooling such as x-tray technician, lab technician, and physical therapy assistant.
  • Civic Service: Urban planning, firefighting, special education teachers.

CBS news interviewed Dr. Laurence Shatkin Ph.D., who also analyzed the U.S. Department of Labor statistics, and his projections gave the following occupations as the top five for growth:

  1. Home Health Aides and Personal and Home Care Aides.
  2. Computer Networking, Systems, and Database Administrators.
  3. Registered Nurses
  4. Medical Assistants
  5. Accountants and Auditors

One last note- once your student has selected a field that there is a future in, research schools with solid programs pertaining to it. Some employers give preference to a degree from certain schools, or look down upon others. Some careers have two year programs that will get your foot in the door. Talk to people in the field to find out what employers are looking for and compare programs. Keep in mind: The shortest route may save you time and money- but will it get the job? As well as food for thought: An ivy league school is not a requirement for a job that will not pay off the student loans.

Share your thoughts: Are you encouraging your child to look at specific careers?

Did you know can help you save more for college? Every dollar counts!

Thursday, August 19, 2010

Where To Start When Thinking Of College Savings

The Bureau of Labor reported for the month of July that unemployment remained unchanged at 9.5%. The long term unemployment ranks (jobless for more than 27 weeks) remained unchanged at 6.6 million. Many of the people were blue color jobs, factory workers, and hands on workers such as the tool and die trade, where machines are taking over previous jobs completed by a person. With those kinds of statistics out there, the bottom line is you have to have a degree to compete. When the economy hit bottom, my husband was one of those unemployed for over a year. He had numerous trades he knew, one of them being high level computer skills such as networking, repair, programming, you name it. He applied for many jobs that required his specialized knowledge, and he had plenty of experience that could vouch for his skills. However they didn’t even give him the time of day without the piece of paper from a university or college to back it up. Higher education is a must in today’s job world.

I didn’t get assistance from my parents for tuition, why should I take out of my retirement to pay for college?

With your financial assistance and support, your student can be out of school that much quicker and into the job market. In a job they are bringing money in to pay off student loans instead of hanging in limbo, halfway through a degree, and their fourth year of school approaching. In today’s economy you can’t count on students working to help fund college. The Bureau of Labor reported that the highest unemployed population was teenage, coming in at 26.1%. Who’s going to take a chance on a teenaged employee, when you can hire a middle aged, more reliable, employee who would be thankful for a minimum wage job. The bottom line is if you start saving early you can make a significant difference in your child completing college. You don’t have to pay for every penny of tuition- there are grants, scholarships, and Financial Aid that will assist with some cost. However, whatever you can save, and as early as possible will make it that much more likely that your student walks away with their completed degree.

Step 1: Look at average tuition costs.

According to the College Board, which is a nonprofit group made up of hundreds of higher education schools around the nation, here’s a look at averages tuition rates right now:

  • Four year university, in state: $19,388
  • Four year university, out of state: $30,916
  • Private four year university, in state: around $38,000
  • Two year schools: $14, 285

Did I mention that those figures are annually? So multiply accordingly on however many years it will take your student to finish school.

Step 2: Figure in inflation.

If you’re like me, and starting early you are looking at 18 years of savings yet. In that case, if you still have a few years before your child leaves the nest factor in inflation rates as well. The website has a calculator on their website that will help you determine a number to shoot for by factoring in today’s average tuition, an inflation rate (they recommend 5%), years of saving that you have, expected years of attendance and the percent of the college costs that you plan to use your savings on. Start early and you have compounded interest to contribute to your end amount.

Step 3: Decide how to save.

There are many different ways to save for college. There are ways to invest, savings, and special education savings plans, as well as tax breaks. Stay tuned for the next blog which will go more in depth on your options.

Share your thoughts: What's your biggest concern for your child's future?

Did you know can help you save more for college? Every dollar counts!

Wednesday, August 18, 2010

What is a 529?

Upon hearing the news that my husband and I are expecting our first child, numerous people have advised us that we should set up a 529 Plan in order to start saving for college NOW. Unbeknownst to any of them, our child is going to be a prodigy, on multiple levels. Not only will he/she be such a genius of epic proportions that the Ivy Leagues will be throwing full ride scholarships plus living expenses his/her way by age 10, but he/she will also be heavily scouted for numerous athletic scholarships, in a variety of sports. However, just in case that doesn’t happen, it is best that we are prepared to fund our child’s education.

I vividly recall, at 5 years old, riding my bike to the bank with my dad, a backpack full of my hard earned piggy bank change in tow. I sat on the counter and watched in awe as my coins were counted in the wondrous machine and then opened my very first savings account. My dad said that the money I saved would go towards college. Since that moment, I knew that I would do the same for my child one day. However this 529 plan sounds much more complicated than a traditional savings account. What is it exactly? Is it a magical machine that will transform my change into enough money to fund the sky-rocketing tuition costs?

Unfortunately, no such phenomenon has yet been discovered. However, the 529 sure does sound like a great option! A 529, also known as a qualified tuition plan, is a state-sponsored investment program developed in 1997 in order to help families save for college. Offering flexibility, control, options, minimal restrictions, and tax advantages, a 529 plan is a great way to save money to apply towards tuition, room and board, mandatory fees, books, and computers. The myriad of advantages of a 529 plan include:

Tax Benefits
Unlike other investment options, 529 earnings do not incur income or capital gains tax.
  • Federal: 529 plans grow tax free, thus you pay no federal tax on earnings
  • State: State tax benefits vary by state. Many states offer a tax deduction, so check this out when choosing your plan.
  • Gift Tax: Under the 529 plan, you can contribute up to 65K in a 4-year period, which is five times the normal 13K per year per student, without incurring gift taxes.
Withdrawals are tax free as long as they are used for qualified higher education expenses (tuition, room and board, mandatory fees, books, and computers).

High Contribution Limits
Limits are as high as 320K in some states.

Low Initial Investment
You can often start a 529 Savings Plan for as little as $25.

Financial Aid Eligibility
No more than 5.64% of savings from a 529 plan can be counted as income towards financial aid eligibility. This is far lower than what they include for traditional savings accounts or other types of investments.

School Choice
A 529 Plan does not tie your child to certain schools or locations, unlike traditional educational savings plans.

Investment Options
There are many plans to choose from and many investment options within those plans. Popular options include age-based plans and pre-paid plans.

Multiple Plans
You can have more than one 529 plan per child. This enables relatives to set up additional savings plans for your child!

Investment Flexibility
You can invest in any state’s plan, no matter where you live.

Beneficiary Adjustability
If your child gets a scholarship or doesn’t go to college, you can transfer savings to a different beneficiary or use them for yourself.

Even though there is no magical tool, and 529 plans do carry risk like any other investment, the flexibility, options, and tax benefits make this a very worthwhile college financing option. This option will still allow me to teach my child to put his/her earnings towards college, and it also provides alternatives if in fact he/she does earn a full ride.

Have you chosen a 529 for your child? Share your choice with our readers. Did you know can help you save more for college? Every bit helps!

Tuesday, August 17, 2010

Where did the time go?! Short-term strategies to fund college.

Those 18 years flew by, and perhaps you had the great intentions but just didn’t quite get enough money saved to cover your student’s tuition. Lost some bucks on the stock market? Maybe having to sit in one more parent-teacher conference, regarding Johnny’s motivation to turn assignments in drove you to the breaking point and your nerves needed that vacation to Cancun. Regardless of the situation, life happens, even with the best laid plans. Here are some tips for saving college tuition, when shipping your darling off to the dorms is just around the corner.

Be careful with UGMA and UTMA (Uniform Gift to Minors Act and Uniform Transfers to Money Act). Joseph Hurley, founder of, warns that these accounts weigh heavily when qualifying for financial aid. Before filling out FASFA forms, transfer these accounts to 529’s.

Urge your student to sign up to be a Resident Assistant: Free board and meals.

529 Plans are not strictly for long term use. Check out the different plans and benefits to short term use.

Search for and apply to scholarships early. If you search the internet you will come across scholarships for merely being left-handed. Kid you not. Have your student search scholarships for up to a year in advance. If your student lacks motivation, you can find the scholarships for them and start an ongoing file that they can gradually work on throughout senior year. Also, study up for the ACT’s and SAT’s to get a little extra scholarship money.

Get used college books. Again, there are tons of websites out there, including where you can buy the book for a fraction of the cost. If you have to buy a couple new, these sites will also give you cash to buy books back when the class has been completed.

Have your student apply for an Independent Study where they can get a job on campus. Put the application in early, because many students put in and there are limited positions. It saves job hunting, job is conveniently located on campus for those who don’t take a vehicle to college, and some of the jobs are pretty laid back allowing for schoolwork to be done on the clock when things are slow.

Research loan forgiveness and repayment programs. Loans are actually wiped out after college or so many years in the profession. Read carefully to make sure the stipulations are followed. There are programs in education, health, law, and volunteer programs such as Peace Corps and AmeriCorps.

If your student is able to handle it, have them take some college courses as dual enrollment during high school. They will have college credits racked up before they even graduate high school, making for a nice chunk of cash saved.

How are you helping your child prepare for the financial side of college life? Share your story with our readers. Did you know can help you add just a little bit more to your college fund? It's never too late to save towards less student loan debt!

Monday, August 16, 2010

How to use Coupons to Save Money

According to online calculators, solely based on the fact that my child is not yet born, projected total cost for college is $312,000, or a monthly savings of $602! Depending on whether your child goes to a public state school or an Ivy League college, monthly savings for a newborn fall anywhere in the range of $400-$1200. If your child is already sixteen, those monthly goals increase to between $1200-$3500. Excuse me? So on top of paying my mortgage, household bills, feeding a retirement account and day- to- day living expenses, I now have to figure out a way to sock away an extra $600 per month for college? There’s no way!

Never say never, my friend. Please take the same advice I offered myself… don’t panic! While these amounts certainly seem daunting, let’s change our perspective and see them as a challenge instead. It’s just a simple mindset change. As my wise, level-headed husband says, our goal is to at least give our child a head start. So I propose a new mantra for us all to follow and an invitation to take on the challenge of finding creative ways to add money to the college fund. The mantra is this: Every Little Bit Helps.

One interesting way that I’ve been saving money that I never thought I would utilize is couponing. Couponing has surprisingly become quite fashionable these days! You can make it as simple or complex as you want and go about it in many different ways. There are myriad websites that basically do all of the leg work for you (some of my favorites are,, and They list where and when to find the best deals and many even provide links to on-line coupons so you don’t have to clip inserts from the Sunday paper. Everybody will offer a different strategy- clipping vs. not-clipping, organizational systems, etc.

After experimenting with this phenomenon for quite some time, I’ve finally found what works for me. Basically, the keys to really saving money with coupons are:

  • Waiting for the sale - Stores know when coupons first come out. They bank on the fact that people will use them right away, therefore items are full price. If you wait a few weeks, the items eventually go on sale and then you get much more bang for your buck.
  • Stacking - Many stores allow you to stack a manufacturer’s coupon with a store coupon. For example, you can use a Target coupon for $1.00 off an item and a manufacturer’s coupon for an additional $1 off that same item.
  • Stocking Up - When you are able to get a great deal on an item, stock up! There is nothing wrong with having extra toilet paper on reserve!
  • Buying what you need - Many coupon sites actually argue the merit of buying things you don’t need in order to save on other items. (You can donate the items you don’t need.) However, I personally find it more worthwhile just to buy what I need and will actually use. Store
  • Rewards/Incentives - In addition to savings, many stores offer rewards and cash back incentives that you can use at a later date. For example, if you buy an item at Walgreens that offers Register Rewards, in addition to the savings you get with your coupon, you will also earn extra money to use towards a future purchase. If you keep it rolling correctly you could end up with some good freebies.

Before you dismiss this idea, consider my couponing item of choice: cereal. Cereal, on average costs $3.50 a box. Well, now, thanks to couponing, I don’t spend over $1.50 for a box of cereal. Sometimes I even get it for free! Now, consider how something as insignificant as breakfast food can impact my child’s college fund:

Let’s say the average family goes through 10 boxes of cereal per month. If purchased at full price, this would be a monthly bill of $35. With coupons, the total cost would be $15 at most. That is a $20 monthly savings, or an annual savings of $240. Invested wisely, at an average return rate of 5% over the next 18 years, savings yield will be $7033.14. Now that’s nothing to scoff at!

Sure, it would be wonderful to completely cover college for our children. Ideally we all will reach those lofty monthly targets one day. However, every little bit helps and by doing something as simple as using coupons to save on everyday household purchases, the savings will continue to blossom.

Now consider the many items you use regularly that could add up to decent “extra free money” through couponing (toothpaste, toilet paper, shampoo, pasta sauce, diapers, tissues, soap, cleaning items, etc. ). The savings can really add up! Keep the ideas coming, be creative, and you may even reach your goal after all!

Where do you look for college savings? Share your tips with our readers. Did you know can help you save more for college? Every bit helps!

Friday, August 13, 2010

What is an Age-Based 529 Plan?

You’ve made the important decision to set up a 529 plan for your child. The hard part is over, right? Well, not quite. One of the advantages to 529 plans is that there are many investment options available to you. However, for many this may not seem like such a positive when investing is a little frightening, uncertain, foreign, or just plain overwhelming. The good news is that you can set up your 529 plan in ways that give you as much or as little involvement as you desire, always with the flexibility to make changes as you see fit. One popular type of plan that suits the needs of all types of investors is an age-based option.

Age-based plans function similarly to a 401K retirement account. Just as retirement accounts are set up to maximize risk and earnings earlier and taper to safer investments as you near retirement, age-based 529s follow the same premise leading up to college age. The risk is greater the younger the child, and as the child nears college age the funds are more securely distributed.

Age-based options are set up so that your money is dispersed in different ways depending on your child’s age. If your child is between the ages of 0-5 you have quite a bit of time to let your money do the work for you. The younger the child, the more the investment emphasis is placed on stocks because there is time for short-term fluctuations and long-term growth potential. As college grows closer money is transitioned into more bonds and secure savings in order to ensure adequate funds when you need them. Even though it’s best to start saving as early as possible, it’s never too late. Even if your child is in high school, you can still reap the tax advantages and investment potential of a 529 plan. Your investments will start off more conservatively since you will need the money soon.

In addition to your child’s age, another factor that plays a key role in deciding upon the right plan for you is your level of risk tolerance. As with any investment tool, the more risk, the greater chance for reward (or loss). If the thought of losing money terrifies you, take a more conservative approach in which at least half of your money is more securely invested in bonds as opposed to a far more aggressive approach in which funds are invested in more volatile stocks. Or perhaps you are feeling adventurous, but also want to ensure some stability. Yet another advantage of 529 plans is that you can set up more than one account for your child. You may want to try one conservative and one aggressive plan in the hopes of off-setting any major losses.

Keep in mind that once you choose a plan you are not locked in. Once you decide on your risk tolerance, there is still a lot of flexibility within each category. You can create your own age-based plan by picking your own stocks, bonds, and reserves within your portfolio, or you can pick a managed fund that does the work for you. You can always change your plan to be more or less aggressive or move funds around to suit your needs.

Remember, these types of plans are designed for long-term investing. In a bear market, it is not always advisable to pull money out if you still have plenty of time for it to recover. If your money takes a downturn and your child is more than 10 years away from college, it is generally okay to leave it alone and ride it out. Chances are the market will recover in that time. Alternately, if your child is nearing college age and you will need the funds soon, it is advisable to move money to more secure funds.

Below is an example of an age-based plan adapted from the Vanguard 529 Plan Age-Based Option. It illustrates how money is allocated depending on the child’s age and your risk tolerance. All of them start out more aggressive earlier and become safer as college approaches.

Best of luck on the next step of your investment adventure!

Are you happy in an age-based 529? Made the switch to something else? Let our readers know! And check out for an easy way to increase your 529 savings.

Friday, July 2, 2010

College Loan Bubble

From The Chronicle of Higher Education:

....there is little doubt that at least until recently [student] loans were being made, bundled, and sold without regard for repayment prospects.

They go on to speculate as to whether the price of college will decline (similar to the price of a house) now that the loan bubble has burst, and argue it will not: one is buying an education in order to sell it to someone else for a profit... If the price of college were suddenly to fall precipitously as housing prices did (a very unlikely event), people who had already been educated would not be left having to sell an asset at a deflated price.

I agree that it's doubtful college prices will fall to the extent of housing, but I do expect certain college prices to adjust in the face of demand. And while this is unlikely to be a price drop (sorry), the rate at which prices increase should fall significantly for the next few years.

The decreases are most likely in the 2-year and distance-learning programs, which generally have student populations harder hit by economic downturns than the "away from home" private and public schools. It is unclear if the Council includes those schools from its auspicious viewpoint of the collegiate landscape.

What do you think? Will decreased demand lower college prices, or is it business as usual, with 6-7% increases across the board?

Saturday, June 26, 2010

The Problem with College Cost Calculators

Lynn O'Shaughnessy, one of my favorite authors covering the family college prep odyssey, has a good article on problems with the government's new net price calculator requirement for college websites.

In response to the "college loan meltdown" of 2009-10, the Obama administration released new requirements for colleges offering US federal student loans, which essentially includes all accredited colleges. One of the requirements is to make a net price calculator available on their website by October 2011 (Obama seems to love long deadlines), to help parents figure out what it would really cost for their child to attend.

Unfortunately, it seems the federal government set the bar for the minimally acceptable calculator too low, the required inputs are just too broad to capture an accurate snapshot of your family's financial situation 5, 10, or almost 20 years into the future. If you remember the FAFSA from your own college days, you'll recall the high level of detail required to accurately report on your family's financial status. Now a calculator with FAFSA-level detail would be flawed in the other direction, asking for so much information, about a time so far in the future, to be of any use to anyone. But, there is more than likely a happy medium, which it seems the fed has undershot by at least a question or two.

Have you found a college calculator that did a great job getting the information that matters and presenting your options? Please share it with our other readers!

Friday, June 25, 2010

What happens to my college fund if my child gets a scholarship? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

What happens to my 529 if my child gets a scholarship?

The parent or sponsor of a 529 college plan is the legal custodian of the funds, and the rules for withdrawals are pretty specific. You can use the money for college/secondary tuition and certain related expenses, such as room & board, books, supplies like a computer, etc. A car for college is probably not going to cut the mustard, the relationship between the object and your student's success at school must be pretty strong.

If you have a good chunk of money saved in your child's college fund (good for you!) that they don't end up using, your options are to transfer the fund to another beneficiary, a child or relative (or yourself, you can use it for post-secondary education as well) hold for the student incase they need it down the road, or cash it out. If you cash out, any gains are taxed and you incur a 10 percent penalty. If your child received a scholarship, the penalty will not apply to an amount equal to the scholarship, but the taxes still do.

To read up on what makes an educational expense "qualified" or not, from the point of view of our friends at the Internal Revenue Service, check out Publication 970 Tax Benefits for Education, and look for the 'Qualified Tuition Program' chapter.

Thursday, June 24, 2010

How do I choose an advisor for my child's 529? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

How do I choose an advisor for my child's 529?

When it comes to college savings plans, the same criteria apply as for any other investment advisor. You still want an advisor who listens to you and understands your needs and your plans for your child’s future. You do not want someone who will simply set up the plan, put it on auto-pilot and move on to the next client. As with most investment vehicles, there are those who have more of an understanding of the ins and outs, ramifications and choices, than do others.

Some good questions to ask are:
  • How much experience does the advisor have with 529 plans?
  • What are the main benefits and drawbacks of the plan the advisor is recommending?
  • Is the advisor also selling the plan to you and, if so, is it the only plan the advisor has available to sell?
  • What commission will the advisor make for selling you this plan?
  • What are the tax ramifications of purchasing a particular plan over the plan sponsored by the state in which you reside?
  • Does the plan have an option for self-guided investment choices?
  • When are you allowed to re-allocate your investments or change your strategy?
An informed advisor should be able to answer each of these questions. Many advisors may only offer one 529 plan. In such a situation, it may be wise to explore other options before making a decision.

Share your thoughts:

Wednesday, June 23, 2010

I'm considering a state pre-paid tuition plan for my child, what are the pros and cons? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

I'm considering a state pre-paid tuition plan for my child, what are the pros and cons?

Pre-paid tuition plans, also known as Prepaid Education Arrangements (PEAs), are generally more suitable for those planning on attending in-state public schools and who are closer to the attendance date. Why? These plans originated as savings mechanisms for use at states’ public university systems. While you may use these funds for private and out-of-state institutions, certain plans may not give you the full value of your investment if you do so. In addition, the investment vehicles generally used in these plans are akin to CDs or savings account 529 plans—very conservative investments. If you have a longer time horizon, other, more aggressive investment tools may be a better choice, depending on your personal investment style.

It’s one thing to look at your baby in the crib and say, “You’re going to college.” It’s another to look at that baby and say, “You’re going to State U.” How do you really know what type of school will best suit your child as an individual and as a student? Some parents know they will use the public university system regardless of other factors, be it costs, child’s desires, special majors, or other factors. For these families, a PEA may be well worth consideration.

The great benefit of a PEA is buying into the cost of college at today’s rates. This guarantee of tomorrow’s education at today’s costs is the equivalent of earning that increased value had your money been invested in a traditional investment account. In other words, you are guaranteed to earn the rate of inflation, whatever that may be, with regard to increased college costs. Another benefit of the prepaid plan is the option to purchase either a contract plan or a unit plan. Unit plans allow you to purchase tuition based on course units, perfect for a student who may be taking classes sporadically. The contract plan allows for purchase of plans by the year, from one to five years of education coverage. In turbulent economic times, the guarantee may outweigh the low returns, but the lack of flexibility remains regardless.

When making decisions about if and where your child or children may attend college, a traditional 529 offers more choice as to where these dollars may be used. Further, the PEA generally covers only tuition and fees, not the related costs of college such as books, course fees, room and board and the like. Some plans do allow for such costs in some circumstances. It is important to check the terms for the state plan you are considering before making a decision to choose a PEA over a regular 529.
The table below summarizes the pros and cons of the PEA plans:

Benefits of a Prepaid Plan
  • Guaranteed to meet increased costs of state education
  • Flexibility as to contract or unit plans
  • Excellent for use at state universities
  • Transferrable to use at private schools, but…

Downsides of the Prepaid Plan
  • Lack of flexibility
  • Low return on investment
  • Narrow definition of covered expenses
  • High penalties for withdrawal
  • May not get full value if transferred for use at private school

Share your thoughts: Are you using a pre-paid tuition plan? Are you happy with it? Why is it better for your family?

Tuesday, June 22, 2010

Why should I keep my money-losing 529 vs. moving to cash or bank CDs? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

Ouch, I lost big money in my 529 last year! I'm considering cashing it out for savings bonds or bank CDs, why should I keep my money-losing 529?

Cashing out a 529 plan has some serious consequences. There are better alternatives. When you cash out a 529 plan, the government will tax you on any gains you may have experienced as ordinary income. You might have “gains” for the purposes of taxation even though the account statements indicate losses from the previous balance. In addition, the government will penalize you 10% of the amount you withdraw from this tax-benefitted account.

One alternative to this drastic step includes re-evaluation of your portfolio. Depending on your plan rules, you may be able to choose a different model and reinvest in a more conservative portfolio. Most plans allow a change in investment strategy on an annual basis. Another option is rolling your 529 into a different state plan, one that specifically provides for a savings account or CD-based portfolio. Five states currently sponsor such plans: Utah, Arizona, Montana, Ohio and Virginia. Thus, you can accomplish your goal of moving to cash-based investments while still maintaining the structure of the 529 and avoiding the taxes and penalties that would otherwise result.

Share your thoughts: Should the early-withdrawal penalties be repealed?

Monday, June 21, 2010

529 versus cash or bonds? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

My child is in high school and her age-based 529 experienced a large decline last year, I am considering moving it to a fixed investment in cash or bonds, what should I do?

There is no one right answer to this question. On the one hand, your need for the funds is coming along shortly and you certainly want to avoid further losses. On the other hand, you give up your opportunity to recoup some of these losses if you change course and reinvest into a fixed or other “low risk” portfolio. When you placed your child’s 529 into an “age-based” account, by the time high school rolled around, the funds really should have been in more conservative investments automatically. That is the idea behind age-based accounts—readjusting on an automatic schedule to conserve funds as the need gets closer. In 2008, however, most typical scenarios went right out the window.

So, with college on the horizon, perhaps the best question to ask is, “What will help me sleep at night?” If you feel you can live with continued risk in an effort to regain some of the losses of the past year, then you can consider staying the course or modifying only a portion of the investments. On the other hand, there is no penalty or taxation issue if you change your investments so long as you stay inside the 529 plan. Many plans allow for only an annual re-allocation of investments. If you are permitted to reallocate, then moving into a more conservative portfolio within your existing plan may be appropriate. A handful of states have 529 plans that invest in CDs or savings accounts. You are allowed to roll your funds into another plan if you so choose. Another alternative some might consider is leaving the current plan alone but creating a second, more conservative, plan for any new dollars added, thereby not putting all your education dollars into the same savings basket. Overall, moving to more conservative investments is a reasonable alternative in the current financial environment if the need is less than three to five years away, as it is if your child is already in high school. A trained financial professional can assist you in evaluating your choices.

Share your thoughts: Are you using the age-weighted portfolio in your 529? Ever re-allocated your assets within your 529?

Sunday, June 20, 2010

If you open a 529, can you continue to make withdrawals after the child is no longer your dependent? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

If you open a 529 for your child, can you continue to make withdrawals for education expenses after they are no longer your dependent?

529 plans are designed to pay college expenses for dependent children or other dependent family members as defined in the Internal Revenue Code. If the child is no longer a dependent, you can no longer use the account to pay for the education expenses of that child. However, one of the great features of a 529 plan is the ability to change the beneficiary. The law allows for a broad range of alternate beneficiaries once the intended recipient is no longer using or eligible to use the funds. Those include siblings of the beneficiary, you, your spouse, and numerous others.

Share your thoughts: How are you supporting/motivating your child to go to college?

Saturday, June 19, 2010

Which 529 plans offer FDIC-insured investment options? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

Which 529 plans offer FDIC-insured investment options?

With the market in upheaval, many families are seeking protected accounts for their education dollars and several states have responded to the call. Currently, five state plans offer FDIC-insured 529 plans: Arizona, Montana, Ohio and Virginia primarily use Certificates of Deposit as the funding vehicle (minimum deposits required), and Utah, which uses a good old savings account and requires no minimum deposit. While the rates of return are very low, these options provide families with the peace of mind that their funds will still be there when needed and will create at least a little growth over time. For families wary of entering the market during volatile times, these FDIC-insured state 529 plans provide an excellent option.

Why an FDIC account? FDIC is a familiar acronym and stands for Federal Deposit Insurance Corporation. The FDIC is the government-backed agency covering account holders in the event of a bank failure, up to certain limits and only for cash deposits in checking, savings and Certificates of Deposit. The full faith and credit of the United States government stands behind banks belonging to the FDIC and therefore provides an absolute guarantee of safety to depositors, unless the government itself fails.

Until the economic tsunami of 2008, the college funding business did not really focus its attention on accounts that could be protected through FDIC insurance because the rates of return were so low. In late 2005, a revision in FDIC rules created an opportunity, however, for 529 plan administrators to obtain FDIC insurance on a collective account with protection for each individual investor, thus opening the door to creation of FDIC-insured 529’s. Now families have the option of tax-benefitted savings for college without risk.

Share your thoughts: Should all 529s qualify for FDIC insurance or another form of government credit?

Friday, June 18, 2010

Will 529s continue to be a smart investment during the Obama administration? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

Will 529s continue to be a smart investment during the Obama administration?

Yes. Why? Covering costs and flexibility. President Obama has made affordable college education one the cornerstones of his administration. Already, Congress has passed the American Recovery and Reinvestment Act of 2009 with important changes to tax credits for education, among other things. The President has proposed the “American Opportunity Tax Credit,” which would offer a tax credit on the first $4,000 of higher education expenses to most Americans. According to the President’s proposal, this amount represents approximately 2/3’s of the average tuition cost at a state university. 529 funds may be used for much more than just tuition, including fees, books, supplies certain equipment and room and board (for those who are at least half-time students. IRS Publications, Ch.8, p.970, “Qualified Tuition Programs.” Should the credit become law (and remember, it is not law at this time), your 529 plan will help fund the balance at a public institution and provide your family with choice as to where to spend your education dollars as this tax credit does not apply to attendance at private universities.

In March 2009 President Obama took a few other steps to help families pay for college including a proposed increase in government Pell Grants for low-income families and revitalization of the government direct lending program for students (cutting out the middleman in these transactions, banks and private financial aid services). Not everyone qualifies for government assistance even should these proposals become law. Planning for your family’s educational needs therefore should always include a strong component of personal savings. A 529 Plan offers a smart option in this arena.

Share your thoughts: Has your 529 kept up with the market during Obama's time in office?

Thursday, June 17, 2010

If I make a withdrawal from my 529, what taxes or penalties will I owe? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

If I make a withdrawal from my 529, what taxes or penalties will I owe?

Did you mention how you are going to spend the money? If you withdraw the funds to pay for “qualified” higher education and related expenses, then you will not be taxed or penalized. That is the whole idea behind the 529 plan: encouraging families to save for college by giving tax breaks.

The IRS defines “qualified” expenses as:

tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution…the reasonable costs of room and board for a designated beneficiary who is at least a half-time student.
IRS Publications, Ch.8, p.970, “Qualified Tuition Programs”

But there is a huge catch. If you withdraw 529 funds for purposes not related to higher education, you will be taxed; you will be penalized. That’s why careful planning is very important in making the decision to save for college.

529 plans are only for higher education expenses, not for primary or secondary private school costs. Other savings vehicles such as Coverdell accounts are available if you think you might want to save for private school before college. A Coverdell account has strict limits on the amount you may invest each year which is why it is not necessarily a recommended option for funding college.

Funds you need to live on month to month should not be invested in a 529 plan because, eventually, circumstances may force you to withdraw funds to pay bills and thus incur penalties. If you find yourself in this situation, you have not done yourself or your child’s educational future any favors.

But let’s say you opened your 529 with the full intention of using the funds for higher education. Suddenly, a huge recession grips the nation, there is high unemployment and you lose your job. We all know it is happening right now. If circumstances beyond your control force you to take funds from the 529 account, you will have to pay taxes in the year you withdraw the funds. Generally the funds will be taxed at the owner’s tax rate but sometimes it will be at the beneficiary student’s rate. If you also received a pass on paying state income taxes at the time you deposited the funds, then the state is entitled to recoup their money as well.

In addition to paying the tax, the federal government imposes a 10% penalty on the amount withdrawn and, depending on where you live, you may also be exposed to state penalties. The penalty is an incentive to leave the money in the account for its intended purposes. It makes you think before you withdraw.

What if you used the money for proper expenses but you have “left-overs?” Do you still have to pay the tax and penalty? Yes. What if your child doesn’t go to college for whatever reason? Yes, if you withdraw the money and use it for general purposes you will still pay taxes and penalties.

Is there any reason to incur these costs? Hardly. Consider the flexibility of the 529 plan. You can use these funds for a child’s education at any time; the account doesn’t expire. You can easily transfer 529 funds to another family member such as a younger sibling without incurring any taxes or penalties. Possible roll-forward 529 beneficiaries include:
  1. Spouse of the beneficiary
  2. Son, daughter, stepchild, foster child, adopted child, or a descendant of the beneficiary or the beneficiary’s spouse
  3. Brother, sister, stepbrother, or stepsister
  4. Father or mother or ancestor of either beneficiary or spouse
  5. Stepfather or stepmother
  6. Son or daughter of a brother or sister
  7. Brother or sister of father or mother
  8. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
  9. The spouse of any individual listed above
  10. First cousin
IRS Publication, ibid.

For these relatives, you may continue to roll the beneficiary forward until the funds are depleted.

Finally, with the costs of college rising dramatically, having excess funds is not the concern of most families. Bottom line, use the funds for the intended purposes; consider the funds a legacy for future generations if not depleted.

Share your thoughts: Have you done a 529 roll-over? What would have made it easier for your family?

Wednesday, June 16, 2010

I want to transfer my UGMA/UTMA into a 529, but I'm worried about losing money, what should I do? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

I'm considering a transfer of assets from my child's UGMA/UTMA into a 529, but I'm worried about making the change in a down market, what should I do?

If there is any good news about down markets, the opportunity to transfer assets from an UGMA/UTMA to an UGMA/UTMA-529 could be the silver lining. Transfer requires liquidation and reinvestment of assets. This creates a taxable event. The reason many people hesitate to make this transfer is the reality of paying capital gains tax at the time of the transfer. The benefit of transferring the assets in a down market may be realization of a loss in value rather than a capital gain, depending on the amount originally invested. In actuality, then, a down market could be the perfect time to make such a conversion. Understanding your basis (the amount of dollars actually invested) and whether you would realize a gain or loss is a good question for your tax professional.

There are great reasons to make the conversion from an UGMA/UTMA to an UGMA/UTMA-529. For one thing, instead of paying taxes on the investment, the account becomes tax-benefitted. The IRS also treats these accounts differently. The 529 is a parental asset while the UGMA/UTMA is an irrevocable gift and therefore an asset of the beneficiary. Although this asset must be reported on the FAFSA for the 2009-10 school year, only 5.6% of the 529 value is expected to be used annually for college versus 20% in an UGMA/UTMA account. Thus, your financial “need” increases and your savings will stretch through more years of school.

There is a big “BUT” about making such a transfer: If you are transferring the assets with the idea that the liberal rules of a 529 plan will override the stricter rules of the UGMA/UTMA, think again. While not every state’s 529 plan requires scrupulous reporting of the beneficiary, the obligation to reserve the funds for the original beneficiary remains. The beneficiary is still supposed to obtain control of the funds at age 18 or 21 depending on the state under which your gift was originally structured. In other words, you can rewrap your gift in a different package, but it is still an irrevocable gift.

Share your thoughts: Do you use a 529 or a trust to save for college? What's working better for your family?

Tuesday, June 15, 2010

What is the current Hope Scholarship Tax credit for college students? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.


ha What is the current Hope Scholarship Tax credit for college students?

Looking for some good news about owing taxes? The Hope Scholarship Tax Credit is reserved exclusively for certain taxpayers who find themselves with a balance due come April 15. For families with one or more child attending college, the Hope Scholarship Tax Credit (See IRS Form 8863) offers some welcome relief. Here’s how it works:

First, the government looks at your Adjusted Gross Income (AGI). The AGI must fall at or below the limits to qualify for the credit. In 2008 that limit is $58,000 for single filers and $116,000 for joint filers. (If the AGI falls between $48,000 - $58,000 for a single filer or $96,000-$116,000 for joint filers, the amount of tax credit available under this program will be reduced.) (In 2009 the credit is phased out for those on the higher end of these brackets $65,000 -- $80,000 as a single filer or $130,000 -- $160,000 for married filing jointly filers.) Next, the credit is calculated by taking 100% of the first $1,200 in eligible expenses and 50 % of the next $1,200 in eligible expenses. For many families this results in an $1,800 tax credit, the limit allowed per eligible student. If a family has two students attending college during the tax year, this credit is multiplied by two and so on. The credit is only good for the first two years for each eligible student. For 2009, the Hope Credit has been renamed the American Opportunity Tax Credit as part of the American Recovery and Reinvestment Act of 2009. The credit amount increases to a maximum of $2,500 per year and is available for four years instead of two.

One of the best aspects of the Hope Scholarship Tax Credit is the nature of tax credits. Rather than merely deducting these expenses from your income, a tax credit is deducted directly from the amount of taxes owed, dollar for dollar. In the tax world, you can’t do better than that!

Share your thoughts: Is your family using the Hope? Should the government expand this program? Let us know what you think!

Tuesday, June 1, 2010

Subprime College

A lot of ink is spilling about the value of a college education. Is it worth the investment? Are their cheaper alternatives? What is the true value of a "brand name" college versus a state school?

College can be a major factor in your future success, but at some level, the college you attend is a symbol of your historical performance, and not your future potential.

An exceptional performance in the first 18 years of your life can lead to a spot in a prestigious school, ranked ahead of most of its peers. The Ivy League is a throwaway example, but you could be focused on a smaller liberal arts education, a west-coast education, or an arts/music education, that would lead to different choices.

Forgetting that college does not guarantee future success is dangerous, and if you pay too much, beyond the realistic expectations of your family's future economic resources (income + savings), then you can find yourself in the same place anyone with too much debt and not enough income gets to, worse off than when they started. The colleges share some of the blame for this, just as the mortgage brokers and mortgage-issuing banks do in the housing crisis. In my opinion, non-profit college financial aid offices need to be held to a higher standard, if they want to keep their tax free status, then they are obligated to provide maximum disclosure on the real cost (loan + interest) and length of time you will be making payments both before and after a student accepts an offer to attend.

But, while freedom drives American prosperity, it exists ying and yang with responsibility, and the buck stops with students and their parents. Can receive a six-figure loan is not in any way the same as should receive a six-figure loan, and if nothing else, students/parents should know that the banker/non-profit college financial aid officer smiling at them from across the desk has no incentive to consider their long-term financial security, that burden is yours alone.

In many cases, not having clear, adult conversations with your college-bound children about your family's financial situation is a big part of the problem. This can be a sensitive topic, and those discussions are best left to another update.

Most parents want the best for their children, and the media, and your real-world social networks do a lot to enforce the perception that a school's name recognition has a powerful positive effect on opportunities available to your children. But the good news is that in all 50 of the United States of America, you can work within the confines of your financial situation and attain a college education that gives you all the skills you need to prosper, without a crippling debt load.

At the moment, the recession is making assumptions such as "name schools lead to the best jobs" subject to painful scrutiny. This is a good time to take stock of what a school's brand can really do for you, and think about the opportunities of a college education that does not come with a huge debt overhang.

What do you think, when does the value of a "brand name" justify the much higher cost and future debt of a private college education?