529 double duty: college plus grad school

http://www.savingforcollege.com/articles/20090710-529-double-duty-college-grad-school

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."

Step 4. Figuring out the timing. The timing of this issue is an important consideration. It's far easier to plan for graduate school when it's clear your child will be continuing his or her education years in advance rather than waiting until a decision during the senior year of college.

"If students are certain they are going to grad school, I advise clients to defer 529 distributions as long as possible," says Robert Standish, vice president of financial planning at BPU Investment Management in Pittsburgh, Pa. Doing that, he says, allows those funds to grow for a longer period of time, leveraging your investment and ultimately providing more funds for graduate school.

When you know a year or two before your child starts college -- or even earlier in high school -- that graduate school is a definite possibility, you have more flexibility to plan for it. Depending on the career path your child is looking at, you'll have anywhere from six to 10 years between when you start saving until when you need to spend all the money in the account. This is because your child will have to get through four years of college and a number of years of graduate school -- two in the case of an MBA, three in the case of law school and four in the case of medical school. You can increase your 529 plan contributions, continue contributing while your child is in college and fiddle with your investment mix in an effort to produce higher returns than the 1 to 2 percent that a money market plan provides.

If, on the other hand, your budding doctor or lawyer waits until the freshman or sophomore year to decide to attend post-graduate school, you have less time, but more than if the decision is a last-minute one (read "I can't find a job, so I'm going to grad school). You can still put money into a 529 plan knowing you have anywhere from four to seven years to grow that money before you have to spend it all. Even $50 to $100 a month can make an impact. "A lot of our clients contribute in the $50 to $200 range a month and even over just a few years, it can make a difference," says Hall.

By saving $100 for five years at an interest rate of 3 percent, you could accumulate $6,522.75. And let's face it: graduate school is so expensive that even if you are only able to pay for your child's books, that is less money that he or she will have to borrow or scrounge up through an outside job or fellowship. Textbooks themselves can easily run more than $1,000 a year, even if you buy used textbooks.

Even if this is a last-minute decision, not all is lost. Most graduate school programs run two years or more, so you could save some money the first year or so to spend on the last year or two, or three. Or, you could contribute money to the 529 plan that you plan to spend immediately on grad school tuition, room, fees or board and take it out 10 days later to make use of any tax deduction offered by your state.

Step 5: Seeking funding help. As with college, the advertised price for graduate school is frequently less than most students pay. In their search for talented and committed students, most graduate schools are prepared to help financially with assistantships, loans, grants and scholarships. In addition, many employers will help with graduate school costs.

"My son got interested in fundraising when he was in college at Penn State and was in charge of a large charity to help kids with cancer," says Cocco. "He ended up getting a job at Columbia University in alumni and donor relations and started in the Masters of Science program there in donor and charitable organizational relations. He's going there for nothing because of his job."

Hall, who is attending the University of North Carolina at Wilmington's International MBA program, notes that his program helps with housing in the overseas portion of the MBA program. Still, his costs are running about $15,000 for the one-year program, which is on the inexpensive side for a master's in business administration.

Posted July 10, 2009