Plan for college at each stage of a child's life

College planning is not just a “set it and forget it” event.

Especially as children age, parents and their advisers need to stay on top of how much has been saved per student and figure out exactly where each dollar will come from to cover tuition and the other bills that make earning a college degree such an investment.

Here's what clients should be doing at each stage of their child's life to remain on track for graduation. The upcoming days, as kids return to school, are a great time to direct parents' attention to college planning.

Starting as early as possible and continuing through middle school, families should be focused on saving and investing as much as possible, according to Marina Goodman, an adviser with Brinton Eaton LLC. Section 529 college savings plans are typically best for this, though keeping an eye on fees associated with the state-sponsored savings plans is important. It's hard to beat the tax-free growth the plans offer, she said.

“There's still long enough to invest in other-than-ultrasafe investments, and the 529 plan is a good vehicle to start with in younger grades,” Ms. Goodman said.

Parents also should look at prepaid-tuition plans if they believe that their children will remain in-state for college.

As children enter high school, it's time to de-risk the portfolio as much as possible.

Families should consider cutting back on spending and looking for any extra dollars for college, including directing students to apply for scholarships and work study programs. Also, this is the time to think about whether the student should spend two years at a local school to save on tuition and living expenses before transferring to a school to complete his or her education and receive a degree.
During high school is also when families need to evaluate whether they will need loans to pay for college and what type will work best for them.

Troy Onink, chief executive of Stratagee.com, which provides college-planning approaches to families and their advisers, said he tries to help families avoid debt to pay for college and recommends that students don't take out more over the four years of school than the annual starting salary for their intended major.

If families have to borrow, the student's first option should be the federal Stafford Loan, which typically has lower rates than private loans and better repayment terms. Students don't start paying back these loans until after earning their degree, in contrast to the Parent Loan for Undergraduate Students, or PLUS, loans that parents take out for their dependent children and must immediately begin to repay, Mr. Onink said.

Some parents also take out home equity loans because they can get a tax deduction on that interest, but that move puts the home at risk, he said. He recommends that parents keep in mind any younger children that will be coming along to college in a few years when they consider loans to pay for a student's higher education.

This is also the time when parents should make sure they aren't putting too much away in a 529 plan, because they will have to pay a 10% tax penalty to get their money back if the funds are not used for college expenses. Advisers recommend having some money saved for college outside 529 plans to cover extra college expenses not allowed by the plans.

Even after the student begins college, parents should continue to strategize as they pay for school.

For instance, if the 529 plan has enough to cover only two years, use money from other accounts to pay some of the early bills to keep that investment plan growing tax-free even longer, Ms. Goodman said.

Also, see if the school that the student has chosen and been accepted to offers prepaid tuition for a whole year or, if possible, the full four years, she said. Typically, those who pay upfront save on tuition increases for future years and can effectively get about a 6% discount. However, funds saved in a 529 plan have to be used to pay costs of a particular year, not a bill for all four years, Ms. Goodman said.

Source:  Liz Skinner, Investment News


The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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