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!

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

When our readers and users of FreshmanFund.com 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.

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

When our readers and users of FreshmanFund.com 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:

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 FreshmanFund.com 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?

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 FreshmanFund.com 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?

529 versus cash or bonds? 529 College Savings Answers

When our readers and users of FreshmanFund.com 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?

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 FreshmanFund.com 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?

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

When our readers and users of FreshmanFund.com 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?

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

When our readers and users of FreshmanFund.com 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?

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 FreshmanFund.com 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?

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 FreshmanFund.com 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?

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

When our readers and users of FreshmanFund.com 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.

1.

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!

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.

http://thecollegesolutionblog.com/2010/05/30/new-york-university-tale-of-2-students/

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?