College Financial Planning for College Costs

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College Costs:

HOW TO FIGURE IT...HOW TO PAY FOR IT

First, the bad news. If you want to send your children to a pricey Ivy League school starting in the year 2010, the total four-year tab per child could approach $300,000!

Now, the good news. An excellent private school can cost only one half to two thirds of the Ivy League school tab, and a good public college or university in your state will probably cost only one third of that amount.

So don't be paralyzed by the "tuition shock" headlines you often read...You can afford a good college. Nonetheless, four years of higher education isn't cheap, so the sooner you begin planning and saving for college, the better.

Figuring Costs. Families often underestimate the total cost of sending a child to college. It's more than just tuition and room and board. There also are requirement fees, books, laundry, perhaps a computer, entertainment, and all those Friday night pizzas. Including everything, particularly unusual expenses such as long-distance transportation. Then consult MWBoone & Associates projections to arrive at an estimated four-year cost and how much you'll need to save monthly to pay the bills.

How to Pay the Bills. If your child is nearing graduation from high school, and you've saved little, your choices for paying for college education are limited. Most likely you will have to rely on a combination of current income, loans, and financial aid.

Saving - If You Have Time. While short term funding of college may be necessary for some families, we recommend that families began saving toward college education expenses much, much sooner. For example, if you begin investing a modest $94 a month at 10-percent interest, starting when your child is one year old, you can build a college fund of close to $50,000 by the time your child's enrolls.

Even if you can't save enough for the entire future tab, whatever you can save can be a significant help. It costs a family much more to pay interest on borrowed funds after college (particularly now that personal interest is no longer tax deductible) than to earn compound interest on money invested before college. Heavy borrowing also can seriously disrupt the parents' efforts to save for retirement or saddle the graduate with years of repayments.

Financial Aid - typically a package of low-interest loans, grants, and scholarships provided by government, the college, or private sources - can provide valuable and often substantial sources of funds, even for higher-income families whose children are applying for expensive private schools. Work-study programs also can aid needy students. However, cutbacks by the federal government are making financial aid tougher to come by, particularly grants and scholarships.

Another option is for your child to enlist in the U.S. military. Under the G.I. Bill, the government will pay an enlistee as much as $25,000 toward education. Some programs will foot the entire bill for medical school. Reserve Officers Training Corps (ROTC) programs, the military academies, and numerous other military programs can provide substantial assistance, if not free education. However to obtain these benefits, keep in mind that your child must fulfill his or her military obligation, usually by serving a specified number of years of active duty.

If borrowing, home equity loans, up to $100,000, are a popular source for funds because the interest is tax deductible (Caution: you are putting the ownership of your home at risk if you can't pay back the loan). State and Federal loans are available, though some have low loan limits. Commercial loans designed specifically for college may actually have lower interest rates than some government loans. Even your employer may offer loans, or you may be able to borrow against your qualified pension plan at reasonable rates. However, a retirement plan loan must be repaid within five years. A distribution from the plan (as opposed to a loan) could be subject to penalties. And remember, you are taking funds intended for your retirement.

The following are a variety of conservative and higher-risk investment vehicles particularly suited for saving for college. If you have a number of years before your child enters college, consider investing some of your portfolio in moderately higher-risk, higher-return vehicles. If you invest only in less risky but low-yield savings instruments, such as certificates of deposit or zero-coupon bonds (held to the date of maturity), you run the risk that your investments won't keep up with inflation and taxes.

Stocks and Growth mutual funds. Although riskier than many other types of investments, equity mutual funds, on average, have proved to generate some of the highest investment returns over the long term. Growth stocks, in particular, offer the advantage of building capital appreciation without producing significant currently taxable dividends. As your child approaches college age, the stocks can be sold for their capital gains appreciation, and the earnings moved into more conservative investment vehicles.

Zero coupon bonds. Zeros are sold at substantially less than face value and do not pay periodic interest, or "coupons". Interest, or gain, comes from appreciation in the value of the bond held until maturity. A $1,000 zero might be sold for $500 and redeemed 10 years later for the full face value, earning interest at a rate of 7.10 percent. In the case of corporate zeros, the annual appreciation attributable to the "interest" element, known as "phantom interest", is taxable by federal and state governments. U.S. Treasury zeros incur federal but not state or local taxes. Municipal zeros are exempt from federal and often state and local taxes on the annual imputed interest. Some states issue tax-exempt zeros known as college savings bonds or baccalaureate bonds. The market value of zeros fluctuates more than that of conventional bonds, but this characteristic can be mitigated by timing the maturity of the bonds to coincide with the child's college years.

Tax-free municipal bonds. Interest earned by these investments usually are free of local, state, and federal tax (capital gains are taxable). These bonds are most suitable for families in higher income-tax brackets where the before-tax equivalent yield of the municipal exceeds alternative taxable income investments.

Annuities and life insurance. These investment vehicles allow for tax-deferred savings, but there are many nuances to these options, both in taxation and cost. We recommend a very thorough review of these issues before purchasing. Age 59 1/2 withdrawal restrictions affect taxation and titling concerns though loans against insurance policies may be tax free.

Guaranteed tuition plans. By paying your tuition today, the state guarantees to cover tuition costs tomorrow, regardless the amount of rise in tuition costs. However, few states currently offer these plans, and the Internal Revenue Service has made unfavorable tax rulings regarding the plans. Rates of return are typically limited to the rate of college inflation meaning that you are effectively earning no "real return", even if the interest is tax free.

Incoming-shifting. Transferring income-producing assets from parent to child no longer provides as much tax advantage as it once did, but for some families this approach can still provide benefits. Consult with us, however, before transferring assets to be sure the advantages outweigh the drawbacks. Remember, when transferring assets, either directly or in the form of trusts or custodial accounts, you ultimately are giving control of those assets to the transferee (your child). Also, under the standard formula colleges use to determine how much financial aid a family is eligible for, students are expected to contribute toward educational expenses a larger share of assets in their name than their parents are expected to contribute.

Roth IRAs. These accounts can be very useful for educational savings. Savings are placed in the parent's account and thus are not considered the child's asset for financial aid. Also, the parent does not give up ownership or control of the assets when the child reaches the age of majority as when transferring assets through Uniform Gift of Transfer to Minors accounts. After 5 years, original contributions may be withdrawn tax-free regardless of age and distributions for education may be tax advantaged as well.

Education or Coverdell IRAs A great option for many people under the new tax law.

Section 529 Plans Fantastic option for wealthy clients looking for mayor estate-tax advantages and educational funding for you or your family members. Certain advantages are unique to these plans under the new law. It's a little known fact that a number of PGA golf schools qualify for tax-free withdrawals from 529 plans.

What we do for our clients:

  • Determine your need for college funding. We will analyze your current savings and expected future contributions and compare that to our expectations for future college inflation for the colleges of your choice. Our database of colleges includes all American colleges and universities and incorporates all expenses, room, board, books and tuition. We will make realistic assumptions regarding your after tax investment returns as well.  
  • We will recommend the type of college funding vehicle we believe is best for you and your child given your contribution expectations, likelihood of scholarship, your tax bracket, the age of your child, and the school choice. It is possible that we will recommend different funding vehicles for different children in the same household.
  • Finally, for those who desire help in implementing our recommendations, we can open and direct your investments in 529 plans, Education IRAs, Roth IRAs, UGMA or UTMA accounts. As independent advisors, we have access to virtually all of the best investment managers available.

Should you wish to get more information or schedule a free introductory appointment click here .

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