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Wealth Management
Insights
submitted by Michael
Chorley, Senior Vice President, Private Wealth
Management,
Minnetonka Office of Robert W. Baird & Company
Post the recent market downturn, how can you put
your college savings plans back on track?
Whether the economic recovery has officially
begun is a subject of debate, but no one can deny
that the cost of a college education continues to
rise. Like most investments, college savings
plans took a hit during the recent downturn...and
the resulting credit crisis has narrowed borrowing
options. However, depending on how long you
have before your children are college aged, there
are things you can do to help ensure their dreams
and your hopes for their future remain on track.
Private lending, particularly in the current
environment, should really only be an option of
last resort for college funding.
What You Should Know:
1. Annual tuition increases are a mathematical
certainty.
Between 1987 and 2009, U.S. college tuition
and fees increased an average of 6.8% annually,
outstripping the rate of inflation. * Some
evidence suggests that the recent financial crisis
may have impacted college endowments substantially
enough to necessitate an even bigger increase for
the 2009-2010 school year.
2. If you have time, consider a 529 Plan.
While a drop of 30% in a college savings plan
could be a major stumbling block for parents of
college-aged children, it may turn out to be a
minor setback for parents planning farther out.
If you haven't already, consider establishing a
529 Plan. These state-sponsored plans
provide a tax-advantaged way to set aside money
for the cost of a child's education while taking
full advantage of compounding over time.
Family and friends are all free to make
contributions, which may qualify as income tax
deductions in many states. Contributions
grow tax-deferred and are not subject to federal
tax upon withdrawal if used for qualified
education expenses.** Additionally,
accelerated gifting techiques for 529 Plans offer
the option for donors to maximize their
contributions in a single year, and could help
bridge the gap faster for children closer to
college age.
3. Don't overlook federal aid options.
Many families think they're too wealthy to
qualify for federal aid. That belief and the
sheer size of the Free Application for Federal
Student Aid (FAFSA) form may discourage them from
filling out the form. However, even if you
are ineligible for need-based grants, applying for
federal aid opens doors to options like
low-interest loans, which you might want or need
to use if your child is at or approaching college
age now.
A few related tips:
-- Government-backed loans often have more
competitive interest rates and better
repayment terms.
-- The deadline to apply for federal student aid
is June 30, although updates or corrections can be
made up until September 15.
4. You might find money in your house.
While reduced property values and tighter
credit markets may make borrowing against your
home more difficult, for people with significant
assets and good credit it could well make the most
financial sense. Home equity loans can carry
very competitive rates, and interest on home
equity loans of up to $100,000 can be tax
deductible if the funds are used for education.
Private lending particularly in the current
environment, should really only be an option of
last resort for college funding.
What Should You Do Now:
If you have some time, say four years or more
before you need to start paying your child's
tuition, talk to your financial advisor about a
529 Savings Plan. If the need is more
immediate, fill out the FAFSA form and file it.
Regardless of your child's age, you should talk to
your financial advisor about which of the above
approaches makes the most sense for your specific
financial situation.
Investors should consider the
investment objectives, risks, charges, and
expenses associated with a 529 Plan before
investing. This and other information is
available in a Plan's official statement.
The official statement should be read carefully
before investing. Depending on your state of
residence, there may be an in-state plan that
provides tax and other benefits not available
through an out-of-state plan. Before
investing in any state's 529 Plan, you should
consult your tax adviser.
* SeekingAlpha, June 23, 2009
** The
earnings portion of any non-qualified withdrawals
from a 529 Plan will be subject to a federally
mandated 10% penalty and will be taxed as ordinary
income to the recipient.
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