Stock market troubles test college parents with fall tuition due

August 30, 2011

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.

“Very few parents have been able to fund 529s enough to fully pay for their child’s complete college education,” says Lynn Ballou, managing partner of Ballou Plum Wealth Advisors, LLC in Lafayette, California. “For those parents, it might be best, if time allows, to pay out of pocket for the early years and then use the 529 plans for the later years.”

Another alternative: Low-cost borrowing. Even a loan in the 8 percent range, like the one Dinos is considering, can beat a 15 to 20 percent hit due to stock market doldrums, Ballou says.

When all else fails in a mediocre market, advisers suggest tapping otherwise overlooked assets.  “If you have a significant amount of cash value in a life insurance policy, it may make sense to borrow from the policy at very low interest rates,” says Clifford L. Caplan, founder and president of Neponset Valley Financial Partners in Norwood, Massachusetts. “In effect, you’re borrowing from yourself since the loan reduces the death benefit and the re-payment of the loan is, in essence, to yourself.” Caplan speaks from experience; he found this strategy “very effective” in 2008 when paying for college education in his household.

Or, you can redouble efforts to find funding elsewhere. When he was applying to schools, Ben Kaplan, now 33 (and no relation to Eve), raised $90,000 through two dozen scholarships and turned his game plan into a book, “How to Go to College Almost for Free” (HarperCollins). He graduated Harvard with an economics degree in 1999 — and zero student loan debt. Now he dispenses advice though his City of College Dreams website.

Ben Kaplan insists parents and students should work as a team, and not stop financial efforts at freshman year. From advanced placement tests (which cut the credit hours students pay for) to hearings with a financial aid officer to get aid packages increased, there are dozens of creative ways to make college affordable, he says.

“A lot of families don’t realize there are lots of resources to help you fund college, and you don’t have to do it just one way,” he adds. “A little bit here, a little bit there, can make a huge difference. But these opportunities don’t come knocking on your door: You have to come knocking on their door.”

If only the market could somehow peg itself to college tuitions. U.S. Department of Education statistics show that since 1976, the cost of a year of school has risen by a factor of eight. The bottom line: The price tag of college triples about every 17 years.

For Dinos, who paid between about $1,300 in yearly tuition at the University of Illinois at Chicago in the mid-1980s, four years at Northwestern will cost the equivalent of a vacation home — assuming tuition stays level. “We’re talking close to a quarter million dollars when it’s all done, with the interest,” he says.

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