Reuters Money
Stock market troubles test college parents with fall tuition due
At 44, Mark Dinos is smart and successful, the kind of lawyer you want on your side if you’re in an insurance-related legal case. But the Chicago attorney gives himself less-than-high grades for how he prepared financially for his daughter’s college education; she starts at Northwestern University just days from now.
Ask him how he’ll manage $59,000-plus in tuition, room and board and Dinos (pictured) replies with a self-deprecating laugh: “Prayer. Fortunately I’ve had a very good year and can accommodate some of that. But Northwestern is only allowing my daughter to borrow $5,500 at the student rate. (That is actually the maximum amount that freshman are allowed to borrow in the Federal Stafford Loan program.) She got a $5,000 grant, so Mom and Dad are responsible for the other $49,000. And now I have to go borrow money at the dumb parent rate, 8.6 percent.”
Yet as Dinos braves one financial roller coaster, many college parents who thought themselves prepared now find themselves riding another. For investors with college funds in stocks or stock-based 529 plans, the recent market gyrations are making stomachs churn.
And while financial experts and wealth managers differ on the best way to ride out the wild market, they agree that parents don’t have to sit back passively and watch that hard-earned wealth melt away.
“The problem is that nobody knows when the falling will stop,” says Matthew Tuttle, principal of Tuttle Wealth Management in Stamford, Connecticut. “Imagine it’s the summer of 2008 and the market has gone down, but hasn’t gotten crushed. You decide to push off taking money out of your 529 plan until March 2009, (which was the low of the market). Murphy’s law of investing says that if you leave the money in, it will go down — and if you take it out it would have gone up.”
Tuttle’s conclusion? “You might as well take it if you need it.”
Try telling that to Eve Kaplan, principal of Kaplan Financial Advisors, LLC in Berkeley Heights, New Jersey. “It never pays to sell investments at relatively low levels unless cash flow issues obligate the 529 plan owner to do so,” Kaplan says. Her clients typically pay tuition, then request refunds from 529s, meaning they can delay repaying themselves in down markets. There’s a catch, though: You need the short-term cash flow to pull it off.
Gen”Why?”: Balancing your finances with boomerang kids
Fred Amrein has three children in their early 20s: the youngest lives in college dorms, the middle lives at home and the oldest — soon to be married — recently moved out.
The “boomerang generation”– young adults who live at home with their parents — are increasingly turning to mom and dad for further financial support. But will caring for your adult children jeopardize your retirement security?
“We’ve managed by creating a timeline that says OK, we can postpone our retirement vision to make sure their lives start out on track,” Amrein says.
Although he feels the financial stresses many baby boomers face to support their children — from paying college fees to handling everyday expenses — Amrein is luckily able to balance financial obligation with fiscal prudence. He’s a financial adviser.
“I have a niche in college funding, so I do a lot of analysis work for parents that are going through this,” says Amrein, principal at Amrein Financial. “One of the things that I do is create a timeline to make sure that they understand when the last child will come out of school and how long they have to recover, so it’s their choice whether they want to lighten the burden on their children or (draft) their priorities from a financial goal standpoint.”
In a study released by TD Ameritrade, 41 percent of young adults admitted to relying on their parents for financial support after college, which could likely derail their parents’ retirement plans. Forty-two percent of baby boomers surveyed said taking their children back into the home had a negative impact on their finances.
“We’ve seen clients spending up to $20,000 a month on their children after they’ve finished college, and they come home and aren’t doing a whole lot,” says Alan Moore, financial planning analyst with Kahler Financial Group. ” It’s killing their parents financially, and we see this with clients more often than I’d like to admit.”
Prepaid tuition plans: Sprint to lock in 2011 rates
If you’re looking for another way to diversify your child’s 529 college savings plan, sprint to the finish; you have two weeks left to consider locking in prepaid tuition at 2011 rates.
There are currently more than 270 private colleges and universities across the nation that participate in the Tuition Plan Consortium, a network that allows you to pay for future tuition and fee costs in current dollars while retaining their value for 30 years.
While a regular 529 college tuition plan usually carries some exposure to volatile markets, the national Tuition Plan Consortium is simply a contractual obligation for any college or university participating in the network to honor your prepaid tuition plan. In other words, you can minimize your market risk.
“Especially for today’s savers, prepaying tuition is not an investment so you don’t have to worry about fluctuations in the market,” says Nancy Farmer, president of Tuition Plan Consortium, a not-for-profit organization that sponsors the Private College 529 Plan.
“When you open an account with us, you don’t have to worry about what’s happening with the market, you don’t have to worry about what’s happening with tuition inflation; our schools take the risk.”
This means if you open an account with $25,000, you own $25,000 worth of tuition at any of the participating schools and do not need to commit to any one school until admissions, effectively keeping your beneficiary’s options open.
If your beneficiary wishes to enroll at a school that does not participate in the prepaid tuition program, and it does not want to join the consortium, you can rename the beneficiary or roll your Private College 529 Plan into a regular 529 plan without risk of tax liability (though you might suffer an earnings/losses penalty of about plus/minus two percent).
4 ways to protect yourself from higher estate taxes
Now that the Washington tax deal is law, most Americans don’t need to worry about estate taxes – so long as they don’t die in the next two years. The agreement between President Obama and Republican lawmakers ends the current uncertainty on estate taxes with an ultra-generous $5 million exemption per individual, with estates over that amount taxed at a 35 percent rate.
But the Obama-GOP tax deal simply kicks the can down the road on both income and estate tax rates into the 2012 election season – and that’s assuming the estate tax provision makes it through Congress.
Next up is a robust debate about deficit reduction between now and 2012 – a discussion that could lead to lower estate exemption levels and higher tax rates just a few years from now.
Estate taxes haven’t been a front-burner issue for the past decade, due to rising exemption rates. Now, that’s changing. “We need to dust this off and think about it for first time in a decade,” says lawyer and business journalist Deborah L. Jacobs. “We all became accustomed to the idea that a huge amount of our estates would be exempt from tax.”
Jacobs, who contributes regularly to The New York Times and a variety of financial publications, recently published a very useful, action-oriented guide to estate planning issues called Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.
I asked Jacobs to comment on the current uncertainty about estate tax rates, and how people can protect themselves against the possibility of lower exemptions and higher rates down the road. She offers the following four “low-tech” estate planning techniques: “They’re very simple, won’t leave you broke, and don’t require lawyers’ fees to implement,” she says.
1. Use life insurance as a hedge. If your estate is vulnerable to estate tax — or becomes vulnerable in the future — Jacobs recommends purchasing a term life insurance policy to cover the projected the tax bill. “If you have a taxable estate, you can buy a term policy to insure that all the money you want to leave to your family isn’t consumed by taxes. Then, if the exemption amount goes up you can let the policy lapse.”
A ‘pure’ savings plan for college can still work
You can still put aside enough money for college if you save. Is this the latest American myth?
According to reader Bill H., a “pure” savings approach worked for his children. It also helped they were good students, obtained scholarships and went to state schools.
“When my kids were born I just started putting money away,” Bill tells me. “Mainly, I would save the entire paycheck from any outside income I had…I usually had about $3,000 a year in outside income.”
“I would also try to save about 10 percent from every regular pay check. My salary was not huge, probably averaged about $40,000 to $45,000 a year, but I was usually saving about $7,000 to $8,000 a year.”
Investing in insured certificates of deposit and conservative stock and bond mutual funds, Bill kept at it for 17 years, when he averaged about 7 percent annual return (good luck getting that today) and had accumulated $200,000. He then took the money out of the stock market five years ago and placed the money in insured CDs.
From the interest on his CDs (about $12,000), he was able to fund one daughter’s college payments, supplemented with other savings, her part-time work and a scholarship.
Is this a fairy tale? Bill says he’s able to save because he lives modestly in his Georgia community.
Sad to say, a great number of institutions are nothing more than “businesses”.
Saving for college the hard way
Nine in ten parents in the U.S. plan to send their child to college, and they’re increasingly taking steps to make that a financial reality, according to a new poll released Oct. 5. Still, many need to do more homework on how to avoid costly mistakes while saving.
The U.S.’s biggest student loan company, Sallie Mae, and polling firm Gallup just released results of a survey, conducted last spring, of about 2,000 parents nationwide with offspring under the age of 18. Sixty percent reported that they were saving for their son or daughter’s college education and were, on average, on track to save more than $48,000.
“What’s remarkable is, despite all the economic problems of the past two years, parents are still optimistic about their children going to college,” said Bill Diggins, Gallup’s lead researcher on the study. “More and more, they prioritize college savings as much as retirement or more because they see real value in higher education.”
Most parents who aren’t saving yet say either they don’t know how or aren’t sure of the soundest approach, the Sallie Mae-Gallup study concluded. Yet, even families who are putting away funds may not be employing the best vehicles.
Half of parents rely on traditional savings accounts or CDs, while, more alarmingly, 24 percent are using retirement accounts, including 401(k)s. That practice leads to added fees and tax penalties when the funds are withdrawn. Plus, once they have taken out the money, it counts as income for the next year’s financial aid assessment. “These families are just digging themselves into a deeper hole,” said Sarah Ducich, senior vice-president for public policy at Sallie Mae.
In the majority of cases, a better alternative is a 529, a low-cost savings account that is tax-free if it is used to pay for education-related expenses. But parents had saved an average of just $3,340 in 529s versus $6,503 in retirement accounts. Nearly half of those not using 529s implied they weren’t taking advantage of the tool and associated tax breaks because they didn’t know enough about 529s. “Education about the benefits of a 529 and how they work definitely needs to improve,” Diggins said.
Nonetheless, families who do save are not only expected to meet their goals but to surpass them. The survey estimated that, on average, savers would put aside nearly $6,300 more than planned. Moreover, while the proportion of families who save does go up as income rises, low- and middle-income families, for whom saving for college can make more a incremental impact, are more dedicated to the task.
The federal government may not want parents to be borrowing from their retirement plans for education, but they do want them to be borrowing. Direct PLUS loans, borrowed by parents and graduate students, help pay for subsidized undergraduate loans and Pell grants.
Saving for the class of 2028
Catherine Onofrey is going to Georgetown. Or Harvard or the University of Illinois. Wherever her top choice is in 2028 — the year this one-month-old New Yorker should graduate from high school.
If, that is, her parents can sort out how to start saving for college. “There is enough going on in the first months of one’s child’s life to make this an easy thing to put off until a quieter moment,” Catherine’s dad, Nick Onofrey, said. “It is hard to know where to begin.”
Indeed, and saving for college is no small commitment. More newborns arrive in August, September and October than any other period of the year, and parents of this fall’s crop will need to put aside at least $200 per month from birth to finance tuition for four years at a public university and $430 per month at a private institution, according to Mark Kantrowitz, a financial aid expert and publisher of FinAid.org.
The obvious vehicle for most families today is a 529 savings account, whose investment income is tax-free if used toward education-related expenses. These state-sponsored plans have been battered over the past two years by stock market fluctuations. Still, they offer parents a wide variety of investment options to choose from, and many funds have recently slashed their fees. The Vanguard Group, for instance, this week cut fees on its College Savings Plan, based in Nevada, in half on some portfolios, to 0.25 percent, or $25 per $10,000 invested, from 0.44 percent.
Which 529 fund to choose, however, is where many parents get hung up. Individual states administer these accounts, but parents needn’t enroll in their own state’s plan — though doing so sometimes offers a income tax break — and, with the exception of pre-paid tuition plans, the proceeds can be used at any four-year and two-year programs nationwide. It helps to consider a plan’s past performance, while also paying attention to high fees. According to the website SavingforCollege.com, a comprehensive resource on 529s, Ohio, Virginia and Utah offer among the lowest-cost options; Montana and North Dakota are on the high end.
“Pick the 529 plan with the lowest fees,” Kantrowitz advised. “All else being equal, one should go with one’s own state plan if the state offers a income tax deduction on contributions.”
It is best to keep savings in a parent’s name rather than a child’s. When colleges assess a family’s need for financial aid, less than 6 percent of the monies in parent-owned 529s are counted, whereas a child’s assets are considered more heavily. Even better are grandparent-owned accounts, which bear no weight on financial aid decisions. “One of the benefits of a 529 plan is that it is treated as though it is a parent asset if the student is a dependent student,” Kantrowitz said.
On my blog I have article on amareshgangal.blogspot.com
about lending-borrowing-then-and-now. This is creating problems in system..
Back-to-school investing
Dan Greenshields is president of ShareBuilder. The opinions expressed here are his own.
Millions of children are getting ready to head back to school. Their parents have a long to-do list before them as well. My wife and I have had to purchase school supplies and new clothes, schedule haircuts, and make sure the kids have finished off their summer reading lists.
Unfortunately, this flurry of activities causes many parents to lose sight of another critical component of any back-to-school checklist: financial planning for our children’s future.
College is one of the best ways to increase a child’s chances for success. But it’s getting more expensive every year. In 2009, private school tuition rose 4.4 percent, to an average of $26,273, according to the College Board. While public school is less expensive, its cost is rising even faster – last year, the average tuition at a public, in-state university rose 6.5 percent, to $7,020.
Planning ahead for this expense will ensure that it doesn’t sneak up on you. Whether you live in Seattle or San Antonio – and whether you expect your child to go to a big state school or a tiny liberal arts college – such planning begins with an assessment of your present situation.
The first questions are easy: How old is your child? And have you started to save?
In the blink of an eye, this year’s fifth graders will be headed off to college. So the sooner you begin saving, the better. I speak from experience. My son is 11 and my daughter is 9. College and the costs – times two – that come with it are just around the corner.
American families are digging deep to pay for college
In the wake of the housing bust and a sagging economy, American families are scrambling to pay for college, according to the latest research from Sallie Mae, which was conducted by Gallup.
With the cost of private universities now topping $35,000 for tuition, fees, room and board each year, Americans are tapping retirement accounts, asking extended family members to help out with college costs and keeping kids at home for the first few years of school to cut down on living expenses. One worrisome trend: Parents who took money from their retirement accounts withdrew an average of $8,554 in 2010 compared to $5,318 in 2009.
To pay for college, families are also borrowing more heavily from traditional sources including financial aid. And usage of 529 college savings plans is on the rise. ”Families are digging deeper and taking a number of measures to make college more affordable,” says Bill Diggins, senior consultant with Gallup. “They see great value in college. It’s an investment in the future. Most strongly agree that a college degree is more important now than ever.”
The findings of Sallie Mae’s study are different from another study conducted by Country Financial which shows that fewer Americans think college is a good investment. The Sallie Mae study found that 83 percent strongly agree (by rating 5 on a scale of 1 to 5) that college is “an investment in the future,” virtually unchanged over the past three years.
Why the discrepancy? The Sallie Mae study focused on families with kids who are actually in college or college-bound (families of undergraduate students aged 18 to 24) as opposed to the general population. “These are actual consumers of a college education,” says Sarah Ducich, Sallie Mae’s senior vice president of public policy.
In the coming weeks, Reuters will examine the trends emerging from this report, including some important demographic shifts among ethnic groups.
Do you have a college-bound kid? How do you plan to pay for it?
There’s absolutely nothing wrong with state universities, and many states have good programs to help those students who have good grades (lottery funding, etc).
Fewer Americans think college is a good investment
Fewer Americans see the value of a college education.
Just 64 percent of Americans currently think college is a good financial investment, down a whopping 16 points from 2009 and 17 percentage points from 2008, according to a new Country Financial survey.
Rising tuition and an uncertain economy seem to be the primary culprits. The silver lining? More Americans (43 percent) say saving for retirement is more important than saving for their child’s college education (41 percent). And that’s a good thing because, as any financial planner will tell you, you can borrow money for school, but no one is going to lend you money for retirement.
That said, college is also expensive. It takes an average of $35,636 to cover tuition, fees, room and board at a private college, and over $15,000 for an in-state public school, according to the College Board. You’ll spend more than $50,000 a year to send your child to the most expensive schools like George Washington University and Bennington College (pictured here).
Back in the day, when I went off to a large state school, tuition was relatively cheap at about $3,000 annually. Now tuition at the main campus of my alma mater, Penn State, is rising by as much as 5.9% for the upcoming academic year. For many in-state upperclassmen, the cost for the 2010-2011 academic year will be $15,582. And the price tag is even more expensive for students in nursing, business and other programs. Out-of-state kids will have to cough up about double those amounts.
My father, bless him, put four kids through college including Dartmouth. Penn State was the cheapest, which is probably why he favors me today. Most Americans (65 percent) say parents should be responsible for paying part of their child’s college education. Eighteen percent believe parents should foot the entire bill, while 13 percent thinks parents should not pay for any college costs, according to the survey.
I’m trying my hardest to save for college. When my son was born, I set up a 529 college savings account to fund his education costs. Each month, $100 dollars is sucked out of my bank account. (I know it should be more, but it’s a start.) And additional funds go into accounts for my two nephews each quarter. Alas, performance in all three accounts has been essentially flat, thanks to the turbulent markets. At least I get a tax deduction from New York state.
I’m surprised that after a month this column hasn’t prompted any comments. The academic establishment is surely one of the great ripoffs in our society today, and the economic value of a college degree is much less than it was decades ago. But the academies have an effective monopoly, and as more degrees are awarded employers find it necessary to increase the credentials required.
I don’t know what can be done, but a good start is to decline to make any contributions or bequests to these corrupt, dangerous empires.
