There was a time not so long ago that I could have skipped this article, saying something like, ìInvesting for college is like any other long-term investment goal. You simply invest in stocks, bonds and/or money market funds like you would for retirement or anything else.î
These days, however, there are now sufficient tax advantaged scenarios and financing alternatives to necessitate a full class on the subject. This is sad for me, since I now have to write an additional chapter. But itís good for you, because if youíve got kids heading off to college next month or 17 years from now, youíre going to be able to save some serious money.
The first piece of advice I have regarding finding the dough for college is this: donít ever pay anyone to help you find the money. You donít need to pay for financial advice and you donít need to pay for help in finding scholarships or other sources of aid. Thereís more free information on the web than you can shake a mouse at, not to mention plenty of face-to-face advice at your favorite high school or college. Besides, paying for help in this area is like paying for help with your taxes: the hardest part is filling out the forms and nobodyís going to help you with that anyway.
As you can imagine, partying nonstop for four years is an expensive proposition; especially if you spend your off hours in classrooms. And itís getting more expensive all the time. From 1979 to 2001 tuition costs increased an average of eight percent per year, which equates to the price doubling every nine years. If the trend continues, kids born this year will require close to four times todayís prices to attend their four-year party. The good news is that in recent years, the level of tuition inflation has fallen, perhaps because colleges are pricing people out of the market and are doing what they can to control costs.
Thinking the Army doesnít sound so bad after all? Well, take heart. Itís because college costs have mushroomed that federal and state bureaucrats have rallied around and tried to make it easier for us by coming up with things like low interest loans and special savings programs.
Before we get too far into saving for college, letís get something out of the way. The biggest mistake you can make when it comes to saving for a college education is to be too conservative. While itís certainly correct that this isnít a place for rolling the dice, itís incorrect to assume that means we should stick with ultra-conservative investments. So letís take a quick pop quiz: Providing we have time on our side, the investment that earns the most money over time, and is therefore appropriate for college savings, is:
If you answered ìA,î you get a gold star. Plus, your kids have a better chance of not having to get a scholarship, beg for loans, deal drugs or otherwise attempt to help finance their college years.
If stocks are the investment of choice for a long-term goal like retirement, it would follow that they would also be good for a long-term goal like college. But remember, since stocks fluctuate in value, theyíre only appropriate when youíve got lots of time: at least five years. So ideally, the time to start investing is the morning after conception. Also keep in mind that as your kids reach their mid to late teens, you may not like them all that much anymore, which is another reason to start when theyíre cute and cuddly.
Ten years ago thatís about all there was to say about saving for college. But since then a bunch of different savings plans have popped up that are intriguing for three reasons. First, some of these things can help you save money for your kidís education. Second, many will help you save money on your income taxes. Third, trying to understand these relatively new investment vehicles will serve as a reminder that even though you graduated from college, youíre not nearly as smart as you think you are.
Letís start with 529 Savings Plans, then have a brief look at some other possibilities.
529 Savings Plans
Anytime you see any type of plan or account that begins with a string of meaningless numbers, i.e., 401(k), itís a safe bet youíre about to be confronted with something related to our income tax code. Which means the investment plan in question must have something to do with saving money on income taxes. Otherwise nobody would be stupid enough to saddle some poor investment account with such a boring name. Such is the case with 529 savings plans, also known as ìQualified Tuition Programs.î This doesnít mean you have to qualify; it means the IRS has approved of the plan: same deal with IRAs, 401(s)s, etc. Theyíre called ìQualified Retirement Plans.î
Since qualified tuition programs are distant cousins of qualified retirement plans, letís do a quick refresher on what makes retirement plans cool, then see how tuition plans compare. With retirement plans:
-Sometimes you get free money when you put money in a retirement account, because your employer matches your contribution.
-If you take money out of your retirement account before retirement age, youíll probably pay a penalty to do it.
-You donít pay income taxes on the money you invest in most retirement accounts. (Or, if youíre investing money thatís already been taxed, you could get a deduction on your income taxes.)
-You donít have to pay income taxes on the profits you make in retirement accounts, at least until you take the money out of the account. The other side of this coin, however, is that you also donít get to deduct any losses you suffer in these accounts.
-Because retirement accounts have these tax advantages, youíre limited as to how much money you can put in them in any given year, and how long you can ultimately leave it there.
Remember all that? I didnít…I had to go back to the chapter on retirement and cut-and-paste. But now weíre ready to see how qualified tuition accounts compare with retirement accounts.
With qualified tuition programs:
-Sometimes you get free money when you put money in a tuition program because your state matches part of your contribution. Matching dollars in these accounts, however, are normally reserved for lower income families, are much harder to find and arenít as generous. Nevertheless, anytime thereís even a whiff of free money in the air, you should check (in this case with the state you live in) and see if you can snatch it up.
-If you take money out of a 529 plan that isnít being spent for college costs, youíll probably pay a penalty to do it.
-You will pay federal income taxes on the money you invest in 529 plans. No federal tax deduction.
-Depending on where you live, however, you may get a full or partial state income tax deduction on your contributions.
-You donít have to pay state or federal income taxes on the profits you make in 529 plans. Not when itís growing, and not when you take it out either, providing youíre using your withdrawals to pay college bills. As with retirement accounts, you donít get to deduct your losses.
-Because 529 accounts have these tax advantages, youíre limited as to how much money you can put in them per year and in total, and how long you can leave it there. However, the limits are much more generous than with retirement accounts. For example, you can normally contribute hundreds of thousands of dollars. Reasonable, since thatís how much some colleges cost.
Now you see how seemingly unrelated things like retirement investing and college investing can be related after all. Both are the result of tweaking a 6,000-page tax code to motivate citizens.
There is a major difference in 529 plans and 401(k) plans, however, that makes them harder to describe in general terms. While federal law authorizes both, 529 plans are offered through individual states. When youíre talking retirement plans, the same stuff is going to apply in Maine and in California. But when youíre talking tuition plans, those offered by Maine may be subtlety different than those offered by California. Thatís why Iím going to have to use annoying words like ìgenerallyî and ìusuallyî when I talk about tuition plans, and youíre going to have to scout for details when you actually go on the hunt.
There are two basic types of qualified tuition, or 529 plans: the Prepaid Tuition Program and the College Savings Plan. Boil it down and the real difference between them is how the rate of return is computed. Letís start with the Prepaid Tuition Program.
Prepaid Tuition Programs
As the name implies, Prepaid Tuition allows you to lock in tomorrowís tuition at todayís rates. Thatís the basic idea. Even if your kid was born five minutes ago, you can pay the cover charge now and theyíre guaranteed admittance to their personal four-year party when the time comes. So hereís one solution if youíre lying awake at night worried about inflation. Getting a life would be another possibility.
While the idea of locking in tomorrowís tuition at todayís rates sounds good, keep in mind that what youíre really doing with a prepaid tuition program is earning a guaranteed rate of interest: you just donít know what it is yet. The interest youíll earn is simply the inflation rate of tuition at colleges in your state. Sound good? Itís no big deal. But before we get into that, letís delve a little deeper into these programs so youíll know exactly how they work.
While the idea of locking in todayís rates is a simple concept to grasp, upon further reflection itís likely to raise questions, such as, ìWhat if my kid doesnít go to college?î ìWhat if she gets a scholarship?î ìWhat if he dies?î ìWhat if she wants to go to an out-of-state school?î
Here are common terms for prepaid tuition programs.
While youíre only investing in one plan with one state, the money you set aside can often be used at any qualified institution of higher education, public or private, anywhere in the country. So if you put money in your stateís plan, intending for your offspring to party at the local state university only to have them later decide to party elsewhere, no sweat.
You can often change plans (say to another stateís Prepaid Tuition Program or College Savings Program) any time until your student begins to take money out. You can normally get a refund with no penalty if your partier receives a scholarship, dies, or becomes disabled and cannot attend school.
Parents, grandparents, or other sympathetic sources can also contribute, either by paying tuition in one lump sum or making monthly payments until the party starts.
Once an account is paid in full, the state prepaid tuition program guarantees payment of full tuition at any public college or university in that state, or will give you that amount of money to use elsewhere. Plus, benefits can usually be transferred among siblings, cousins, and other eligible family members with no penalties.
As noted above, withdrawals for tuition are state and federally tax-free, and so are the earnings in the account. If thereís extra money left over after tuition is paid for, it can be used to pay other qualified bills like room, board, and books.
That should answer some of your questions: letís try an example and see if that will pick up the rest.
Robert and Cheryl Coggins live in Kentucky and are therefore eligible for Kentuckyís Prepaid Tuition Program. It is their intention to use the plan to pay for the education of son Austin, who is now seven years old. There are three Prepaid Plans available in Kentucky: the Value Plan, the Standard Plan, and the Premium Plan. The Value Plan is designed to pay tuition for Kentuckyís technical and community (two-year) colleges. The Standard Plan is for public four-year universities, and the Premium Plan is designed for Kentuckyís private universities. Robert, who has made a perfectly good living in diesel repair, likes the idea of technical school and the Value Plan. Cheryl, however, likes the idea of a Vanderbilt man in the family, and thus favors the Premium Plan. In the end, they compromise on the Standard Plan.
The target tuition for the Standard Plan is the average expected tuition for Kentuckyís most expensive public university, which that year happens to be the University of Louisville. According to the pencil pushers, the four-year tuition for the University of Louisville, if paid today, would be $15,000. The Coggins go for it. They sign up today, locking in the 15 grand tuition. They pay it off by making monthly payments for the next five years. (Because they choose to make payments rather than paying in a lump sum, they also have to pay what amounts to a finance charge, although itís called an ìannual investment premium.î)
When they started the plan, Austin was seven. Fast forward 10 years: Austin is now 17 and ready to party like a rock star at his parentsí expense. Now itís time to see just how much money heís going to have. The most expensive tuition at a public university in Kentucky is no longer at the University of Louisville. Now the priciest campus is the University of Kentucky, where the four-year tuition is $34,000. Bingo. Thatís the amount Austin now has at his disposal: the most expensive public school tuition in the state. (By the way, if you grow $15,000 to $34,000 in 10 years, youíve earned about eight and a half percent.) If he decides on a two-year technical school that only costs $9,000, heís got money left over that he can either pass down to sister Anna or use for books or other qualified expenses. And if he decides to be a Vanderbilt man after all, heís got $34,000 to apply toward the estimated $290,000 tuition bill. In this case, of course, Robert can forget about ever retiring, but thatís not Austinís problem.
Getting a clearer picture now? What happens with a Prepaid Tuition Program is that youíre going to buck up now, then earn whatever the inflation rate is for tuition in your state until college starts. If inflation is a million percent, you come out smelling like a rose. If itís two percent, you could have done a lot better. But at least you got some tax breaks, and you know that should your kid desire to attend a four-year party close to home, theyíll be able to.
As I write this there are 19 states that offer prepaid tuition programs, but no matter when youíre reading it that number will undoubtedly have grown. So rather than just give you the current states, Iíll give you a place to find an updated list instead: www.collegesavings.org. (This is one of many sites that devote lots of cyber-ink to what appears to be objective information about every aspect of financing a college education. Another one is www.finaid.org. Iíll sprinkle in others as we plod along.) And as I mentioned, there are differences between plans, so be sure and study the one offered by the state where you live, which is most likely the only one youíll be eligible for and therefore the only one youíll care about. And donít forget to see if there are matching funds available. But donít hold your breath.
College Savings Programs
When I was 18 my parents said theyíd pay for college, but only if I agreed to go at least 1,000 miles away and stay there until after I graduated, joined the Army or turned 40, whichever came first. Since keeping a kid that far away for that long is an expensive proposition (trust me: no way I was joining the Army) they needed maximum bang for their buck. Too bad they didnít have college savings plans back then.
A Prepaid Tuition Program is like a Certificate of Deposit: your return is guaranteed, and you earn whatever the inflation rate is. A college savings program is more like a 401(k) plan: you put in what you put in, decide which options to choose, and it earns what it earns. So unlike a prepaid tuition program, youíre not locking in todayís tuition. No guarantees: youíre just setting aside money that will hopefully grow enough to pay the future tab. Also like 401(k) plans, youíll be asked to choose among investment options including various stock, bond and/or money market funds. Unlike your 401(k) plan, however, most plans suggest a predetermined mix of stock and bond funds based on your kidís age to save you the trouble of dealing with it. (Hopefully this sounds like a familiar strategy by now.) As with any configuration of mutual funds, there are fees attached. And as we learned when we discussed mutual funds, management fees erode fund performance. So itís important to look at fees and performance in whatever plans youíre considering and remember: no two are exactly alike.
So that we can better understand college savings programs, and so that I can squeeze more of my friendís names into this book, letís use another example.
Olaf and Frauke Haas are natives of Germany now living in Florida. In the families where they grew up college was mandatory, and thatís a tradition they plan to continue with their four-year-old son Charles. The only unknowns as far as theyíre concerned are where heíll end up attending and how theyíll pay for it. They like the idea of college savings programs, and find no shortage of information on the subject. In fact, they find websites that offer textbooks full of information: explanations of the various plans; rankings according to investment performance, fees and lots of other criteria; links to each stateís plan; pluses and minuses of using these plans; tax advantages, etc. etc. etc. Some sites they visited: www.morningstar.com, www.kiplinger.com, www.finaid.org, www.savingforcollege.com and www.collegejournal.com. They also found some useful information at Money magazineís website (http://money.cnn.com/) and by looking up archived articles in the online edition of their local paper and USA Today (www.usatoday.com.)
As with prepaid tuition programs, the first place to look for a college savings plan is the state where you live. So thatís where Frauke and Olaf started. If they lived in a state with high state taxes, theyíd be sorely tempted to use that stateís plan because it may have offered them state tax deductions for money they invest. (As I write this, 25 states offer at least some benefit. Five offer a full deduction; 20 offer a partial deduction.) Happily, however, they live in Florida where there arenít state income taxes. Thereís another reason to check out their state plan, however. As I mentioned earlier, some states also offer matching money, especially for families whose incomes fall below a certain threshold. Unhappily, this opportunity doesnít exist in Floridaís plan.
So after checking the Florida College Savings Program, Olaf and Frauke learn that thereís no reason to stick close to home for Charlieís savings plan. Which leaves them with a lot of flexibility, since most states welcome out-of-state investors in their college savings programs.
At finaid.org they find a ranking of plans specifically for out-of-state investors that considers a slew of factors like account performance, fees and minimum contribution requirements. In just a few seconds, they learn that California, Connecticut, Georgia, Hawaii, Idaho, Illinois, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New York, Oklahoma, Tennessee, Utah and Vermont all have good grades. Thatís still a lot of choices, so they look for ways to narrow it down. They turn to Savingforcollege.com for another ranking of plans based on similar factors. They compare the two lists and find the following plans appear on both: California, Connecticut, Georgia, Hawaii, Illinois, Michigan, Minnesota, Missouri, Nebraska, New York, Oklahoma, Utah and Vermont. Still a lot to consider. Now they head to Kiplinger.com to see whatís recommended there. The only plans that appear on all three sites are the ones from Michigan, Minnesota and Utah. Now they have a manageable number to look at and compare individually.
Of the three plans remaining on their list, the Michigan and Minnesota plans are almost identical, which comes as no surprise because theyíre both managed by TIAA-CREF, the monster investment company originally set up to invest retirement money for teachers. TIAA-CREF is a great investment manager for two reasons: theyíre good performance-wise and theyíre cheap fee-wise. For example, these plans had expenses of only .65% per year. Pretty good considering many plans have expenses as high as 2%. And who wants their return reduced by 2% when it could be shaved by a fraction of that amount? Another plus for the Michigan and Minnesota plans is a minimum contribution of just $25. Canít get much lower than that. Ok, now itís time to see what Utah has to offer. The asset manager is a name they recognize: Vanguard. And as with Vanguard mutual funds, the expenses here were scraping the bottom of the barrel: just .35%. In addition, the Utah/Vanguard plan was also the simplest, since it offered only three basic investment options: a stock fund and a bond fund and a money market fund (which also should ring a bell.) The minimum contribution was higher than the other finalists: $300. But that wasnít a deal-breaker: they could invest in that increment. They decided to take a closer look.
A link on the Kiplinger.com website took them directly to the Utah Educational Savings Plan Trust Website (www.uesp.org.) where they learn exactly what the plan looks like. Letís look over their shoulder and check it out.
The Utah plan, as with most other College Savings Plans, invests in a mix of stocks and bonds depending on the age of the future student. In addition, the mix can be further refined based on the risk tolerance of the investor, leaving you with four separate possibilities. Hereís a table laying them out, condensed from their online brochure:
When you first look at this chart itís confusing, but stare for a second or two and it comes into focus. On the left, we have the age of our future student (known in plan lingo as the beneficiary). As with the ultra-simple formula that we used to divide up our personal savings in the chapter on asset allocation, we see that College Savings Plans use the same criteria, i.e., age, to divide up our kidís savings.
The options get more risky (and therefore more potentially rewarding) as you read from left to right. Option One is for the super-conservative: no matter what the kidís age, the moneyís staying in money market funds from birth through graduation. Option Two starts off heavy in stocks, then reduces the amount as college age rolls around, ending up entirely in money market funds during college. Option three gets a little dicier: heavy in stocks pretty much the whole time. Even while the student is enrolled 35% of their savings are still in stocks. And option four is strictly for those who eat razor blades for breakfast: all stocks all the time.
Olaf and Frauke feel that the most prudent course for them is Option Two, because it feels a lot like their own investment planning: more stocks when time is on their side and less as the target date approaches. Perfectly logical. And itís even simpler than their retirement investing because Utahís investment managers reallocate the funds automatically as Charlie ages. All they have to do is sign up (they can download the application online) and start investing (can be done with automatic withdrawals so they donít have to remember to write a check). What could be simpler? Theyíve created a miniature version of their own investment mix thatís just as simple and just as low-cost. Theyíve spent not much time, gotten whatís very likely to be the biggest bang for their buck, and ended up with a plan thatís exceedingly simple. In other words, theyíve acted like 60-minute money managers.
As we prepare to leave our discussion on Prepaid Tuition and College Savings Plans, letís stop and reflect for a moment on why Olaf and Frauke might have opted for a college savings plan instead of the prepaid tuition version. First, Frauke considered that while the average inflation rate for tuition over the last 20 years averaged eight percent, the stock market averaged more than 10% during that same period. Furthermore, Olaf noted that the inflation rate for college costs had declined in recent years: numbers he found at the finaid.org website indicated the rate from 1996-2001 had averaged only about six percent. Finally, the asset allocation model that theyíve discovered in college savings programs closely resembles their 401(k) and other long-term investment plans. If itís good enough for them, shouldnít it be good enough for Charles?
When you opt for a College Savings Program over a Prepaid Tuition Plan, what youíre doing is opting for an uncertain return (more risk) in exchange for additional potential profit (more reward). A prepaid tuition program is doing nothing more than locking in a rate of return thatís equal to the inflation rate of that stateís tuition. If stocks and/or bonds outperform that rate (likely, at least over time) youíll be leaving money on the table and would have been better off in a college savings program. If stocks and/or bonds under-perform the stateís tuition inflation rate, youíd have been better off in a prepaid tuition program. Since stocks historically have outperformed inflation (including the higher rate of inflation relating to tuition) a College Savings Program should be the logical option, especially if you start early. Deposit $300 a month for 13 years and earn six percent, youíll end up with $71,000. But earn nine percent and your four-year-old will start partying with $87,000.
I hasten to add, however, what Iíve said before when it comes to the stock market: the goal isnít just maximum return. Because just as important is comfort. If youíre more comfortable knowing that youíve got your costs covered, then Prepaid Tuition is for you. If you like the idea of more risk for more reward, then you should consider a College Savings Program. Neither is a stupid choice, and both offer good tax breaks. Just make sure that kid goes to college, or someone in your family does, because the penalty for non-college-related withdrawals is 10%, just like early withdrawals from qualified retirement plans. And since a 60-minute money manager never pays penalties, you know what youíll have to do if none of your kids will use the money? Thatís right…youíll have to go back to school yourself to make sure that money gets used. And now that youíre older, four years is a long time to party.
I think Iíve droned on long enough regarding 529 plans. Iíve told you where to find plenty of information to study, and if one of these plans sounds interesting, study you should. Just remember the key benefits of both plans:
1.Your money grows tax-deferred (like an IRA, 401(k) or other retirement plan.)
2.Depending on the state you live in, you may get a state tax deduction for money you invest. You wonít, however, get a federal tax deduction.
3.When the money comes out to pay for tuition or other qualified college costs, it will do so free of both state and federal income taxes. (But remember that the federal tax benefit will expire in 2010 unless Congress does something to make it last.)
You may think class is now dismissed, but itís not, so stop fidgeting and looking at the clock. There are still a few other tax-saving, college-related investments to study. But weíll hit them quickly, along with sources for finding the details when youíre good and ready to look at them in detail.
U.S. Savings Bonds
You already learned about savings bonds back in the bond chapter, but since that was more than a hundred pages ago, hereís the down and dirty: theyíre safe, they pay decent interest, you donít have to pay Federal taxes on the interest until you cash them in, and you never have to pay state taxes at all. What could be better?
Hereís what could be better: a program that makes the interest from U.S. Savings Bonds federally tax-free when you cash them in. And what do you know…there is such a program! Itís called the Education Bond Program. Use the interest you earn on Series I or EE Savings Bonds for expenses related to higher education, and you get to bypass federal income taxes on the interest. One caveat, however: if you make too much money, you donít get to skip the federal taxman after all. In this case, Uncle Sam considers you rich if youíre single and have a modified adjusted gross income of more than $58,500, or if youíre filing jointly and have a modified adjusted gross income of $87,700. Thatís just when the federal tax exemption starts fading, however. It doesnít disappear entirely until you reach $73,500 single and $117,750 joint. In case youíre wondering what the heck ìmodified adjusted grossî income is, wonder no more: itís basically just adjusted gross income plus the interest youíre earning on these otherwise tax-free savings bonds. And in case youíre wondering what adjusted gross income is, donít sweat it, thatís coming up soon in the chapter on income taxes. But if you canít wait, you can just look at the first page of any 1040 tax form and youíll immediately see how gross income becomes adjusted gross income.
Dying to learn more about the Education Bond Program? God help you. But if thatís your itch, hereís where to scratch: download IRS form 970 at irs.gov, go to savingsbonds.gov, or finaid.org.
These are actually not called Education IRAs anymore. When the government realized theyíd named something simply and in a cleverly descriptive fashion, they rushed to change the name to something more obtuse. So now theyíre called Coverdell Education Savings Accounts. If youíre up to speed on the basics of IRAs and the other education-related investments weíve already discussed, youíll easily master the rules concerning Coverdells. Max amount any beneficiary (translation: student) can have invested in their behalf in any given year is $2,000. Money going in isnít deductible; money earned isnít taxed while it accumulates; money coming out is tax-free providing itís used for education-related expenses. And guess what happens if you take money out that isnít used for educational expenses? If you answered, ì10% penalty, and you have to pay taxes on the earnings,î youíve made me very proud indeed.
One thing that makes Coverdells a little different than using Savings Bonds or other education savings vehicles is that these accounts donít have to be used for higher education. They can be used for any kind of education, including elementary and high school.
As with our Education Bond Program and some other types of IRAs, Uncle Sam takes back his promise of tax-free withdrawals from Coverdell accounts if you make too much money. How does Uncle Sam define ìrichî this time? Tax-free withdrawals start phasing out for single filers with modified adjusted gross income of $95,000 and joint filers who hit modified adjusted gross of $190,000. And they disappear entirely when that rich single filer hits $110,000 and the joint filers arrive at $220,000. The definition of rich changes more often than a chameleon in plaid factory, doesnít it?
For those who are planning to actually use one of these accounts or are really hurting for reading material, download IRS Publication 970 at IRS.gov. You can also get the details at college-related websites like finaid.org.
Traditional and Roth IRAs
If youíre under 59 ½, you can still take money out of traditional and Roth IRAs without triggering the 10% penalty if the money is going to be used for qualified education expenses. Fine, but you still have to pay taxes on the withdrawal: taxes on the whole amount if itís a traditional IRA and taxes on the earnings if itís a Roth. So this is obviously not your best choice, and should probably be reserved for those whose children are unwilling or unable to forage for aluminum cans on the side of the highway.
I could ramble on practically forever when it comes to financing a college education because while weíve talked about the basics of different investments, we havenít even touched on financial aid in the form of scholarships, loans and grants. Nor have we talked about the tax breaks you get by being able to deduct interest on student loans, or collect credits like the Hope Credit and the Lifetime Learning Credit. The problem is that if I cover everything, weíd be looking at a book here rather than a chapter, so Iím going to have to stop soon. But before I do, a few more notes.
When you start your college planning, become acquainted with the possible ownership of college-related savings accounts, as well as the advantages and disadvantages of each. This is important because sometimes who owns investments will radically affect your future partierís ability to get aid. Weíre often tempted to put savings accounts and such in our kidís names because theyíre in lower tax brackets than we are. But this can be a bad strategy because students are normally required to contribute a much greater portion of their savings (typically 35%) before qualifying for aid, while their parents are required to contribute a much lower percentage (not more than six percent). So youíre probably better off keeping college savings in your name rather than mini-Einsteinís, at least if thereís a ghost of a chance that theyíll someday qualify for aid. In any case, read about it at any of the college websites Iíve mentioned before you forge ahead.
One of the first things I said in this chapter was that you never, ever pay for help in finding scholarship or grant money, because thereís nothing you can pay for that you canít get free. For example, you can do a free scholarship search at sites like www.fastweb.com, www.scholarship.com, www.collegeboard.com, and a ton of others. (I just did a search for ìcollege scholarship searchî and got more than a million hits.) You can go to the public library and check out any of dozens of books on the subject. You can contact any high school counseling or college financial aid office for ideas. Trust me: there are far more free sources for college scholarship assistance than there are hours left to use them, no matter how old your kid is. All this information used to require a degree to assimilate. Now it just takes a few clicks of a mouse.
As to the tax deductions and credits available for those readers already laboring under the tuition burden, I really donít have to explain much. Because your $20 tax preparation software program never sleeps, and it wouldnít think of letting anything claimable slip by.
In conclusion, while saving for college seems to be an onerous task, for the 60-Minute Money Manager, itís no big deal. Yes, the ramp-up process does require a bit of extra effort. But as youíve seen, most of the options are basic, logical and resemble other things weíve already encountered. And once youíve made your selections, theyíre pretty low maintenance. A small price to pay for a four-year party!