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COLLEGE SAVINGS 101

529 double duty: college plus grad school

Posted: 2009-07-10 - Amy Buttell is a freelance writer based in Pennsylvania

by Amy E. Buttell

To give your child an edge, graduate school may be called for, but that can more than double your higher education costs.

This is where a carefully funded Section 529 Plan comes in. While all but the very wealthy won't be able write a check for college and graduate school, you can use 529-plan money strategically to pay for some of both so that your child won't be overloaded with debt come graduation day.

For many students it's largely uncertain they will actually attend graduate school. One day the student will say it's a near certainty but a few months later, they're talking about backpacking through Europe. This leaves you trying to plan for something that may not happen.

Here are five steps you can take to assess the likelihood your student will attend graduate school with some ideas on how to decide the best way to allocate your 529 savings between college and the next level.

Step 1: Examine the graduate-school plan. First, assess how serious your student is about graduate school. If it's been mentioned more than a couple of times, it's time to discuss the student's intentions and plans. Here are several important questions to ask:

  • What do you plan to do with that degree?
  • How do you think that degree will help you get the job you want?
  • Where do you plan to apply?
  • What will you do if you don't get in?
  • How much will the degree cost?
  • How do you plan to pay for it?

If your child is just making conversation, you can encourage some serious thought and some research on their part before you discuss the issue again.

Step 2: Look at funding resources. If you establish that your child is serious about graduate school and you are willing to provide some financial support, you should look at your financial resources and theirs and come up with a tentative funding plan.

Look at the anticipated costs and expenses and compare that with what you've saved. If you're like most parents, you'll have a shortfall. If so, first examine whether you or your child have other resources to bridge that gap, such as current earnings, scholarships or grants, low-cost loans or work-study jobs.

You could decide to dedicate the funds you've saved before your child starts college for the undergraduate education and target anything else you can save between college and graduate school for continuing education. Many parents keep contributing to a 529 plan while their child is in college to reap tax benefits and to continue the discipline of saving for later college years or graduate school. Alternatively, you could decide that a certain portion -- say 75 percent of what you've saved in the 529 plan -- is earmarked for college and the remaining portion for graduate school.

Salvatore Cocco, Jr., CLU, a financial adviser with AXA Advisors in Woodbridge, N.J., advises parents to be careful of committing too much money to future graduate school tuition, because your child could change his or her mind. "When you're funding college, for most families, there is a 90 [percent] to 100 percent chance the kids will go to college and that money will get spent," he says. "With grad school -- even law school or medical school -- it's a 50-50 shot at best."

On the other hand, it's hard to overfund college, so even if you put extra money into a 529 in anticipation of graduate school and it doesn't happen, there's nothing lost. College is so expensive and 529-plan spending rules are so flexible, says Cocco, you're likely to be allowed to use the funds to pay for anything from tuition, room, board, books, travel expenses to and from college, fees and study abroad.

Step 3: Consider your other obligations. Even with graduate school in the picture for one of your kids, you should keep in mind your overall financial obligations to your retirement fund and your family emergency fund as well as helping pay for a higher education for all your children.

One strategy Scott Hall, a financial adviser with Market Street Advisors in Wilmington, N.C., uses is to direct more 529 savings to the oldest child's account.

"For a family with two kids what we'll have them do is put a higher percentage of the money into the older kid's account, in case they do want to go to grad school," he says. "That way, they have more money there to use. If that child doesn't go to grad school, you can take that money and combine it into the younger child's 529."

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