A late start on saving for college

By: Savingforcollege.com


Dear Joe, My son is 16 and although I have been saving a little bit for college, I'm not even close. His grades are not the best either, so I don't know about scholarships for him. What are my options at this late stage? -- Willie


Dear Willie,

First, I want to commend you on whatever you've been able to do thus far in saving for college. Rest assured, millions of American families with the same worries as you have managed, one way or another, to get their children through college without impoverishing themselves. Where there's a will, there's usually a way, and a low level of savings should not deter you or your son.

One of the more obvious ways to handle college costs, when money is scarce, is for your son to consider a low-cost school, such as your local community college. According to a recent report from the College Board, the average total tuition and fees for the 2005-2006 school year at two-year public colleges is $2,191. This compares to $5,491 at four-year public universities and $21,235 at four-year private colleges. Enrollments at two-year colleges have been soaring, with many students planning to transfer to four-year colleges later.

Higher-education tax breaks can reduce your cost even further. The Hope credit is worth up to $1,500 per eligible student this year, increasing to $1,650 in 2006. The Lifetime Learning credit is an alternative to the Hope credit, offering up to $2,000 in annual tax savings per taxpayer. The income phase-out range for these credits is $43,000 to $53,000 in 2005 ($87,000 to $107,000 for married couples filing jointly), increasing in 2006 to $45,000 to $55,000 ($90,000 to $110,000 joint). Eligibility requirements are more fully explained in IRS Publication 970, available online at www.irs.gov.

A community college is certainly not your only option. If your family qualifies for need-based financial aid, even the highest-priced private colleges can become economical choices. Be sure to file the Free Application for Federal Student Aid, or FAFSA, in January of your son's high school graduation year. Federal aid can take the form of grants, loans and/or work-study. Grants are best, of course, because they do not have to be paid back. However, the primary source of grants -- the federal Pell Grant program -- is reserved for very low-income families.

Federal Stafford and PLUS loans are available even to families without demonstrated financial need. And beyond the federal programs, many banks offer private education loans along with home-equity loans. You can even take loans from your 401(k) plan if it is set up that way. No one likes to borrow, but surveys show that a college degree is one of the best investments possible.

I recommend that you become familiar with the financial aid process now, while your son is 16, because you may find that his eligibility can be increased by taking certain steps in managing your family income and assets between now and the time you file the FAFSA. For example, any investment assets in your son's name should be "spent down" before applying for financial aid. Student assets are assessed at a high 35-percent rate in the federal aid formula, while only 5.64 percent or less of a parent's assets are counted. You can find a number of Web sites with helpful information about financial aid, including the Department of Education's own Web site at www.ed.gov.

Encourage your son to get his grades up as high as he possibly can. He probably does not realize how important grades are, not only to the admissions decisions at selective schools, but also to the awarding of school-based scholarships. Many private colleges will offer thousands of dollars in tuition reductions to students who rank high in their high school graduating classes or have good grade-point averages.

Look at other scholarship sources as well, especially Rotary and other civic organizations in your own community. Online scholarship databases contain billions of dollars of potential awards, but be on the alert for scams. A tentative decision by your son to enter a particular field of study, or a specific profession after college graduation, can be worth a lot of money. It's amazing how many scholarships are targeted to students with an interest in teaching, just as an example.

The last option I'll mention is making adjustments to your family budget to accommodate the additional expenses for the four years or however long it may take for your son to get through college. He can contribute the earnings from a part-time job. You may sacrifice a family vacation or delay the purchase of a new car. Take some time now to identify specific steps that you and your son can take to be in the best possible financial position by the time the college bills begin to roll in.

Popular Questions


Two kids, two 529 plans?

Dear Big Bill,
While it's possible to maintain a 529 plan in just one child's name, even when you intend to send more than one child to college, I generally recommend that families open a separate 529 account for each child.

That's assuming there is no additional cost to maintaining multiple accounts. If your 529 plan charges an annual or quarterly account maintenance fee, check to see if you can avoid the fee by signing up for automatic contributions through payroll deduction or electronic funds transfer)

With a separate 529 plan for each child, it becomes easier for you to tailor the mix of stocks, bonds and stable-principal investments (e.g., stable value, guaranteed principal and money market funds) to the particular ages of your children. When your older child is nearing high school graduation, you may want to ratchet down the level of market risk in her 529 plan. At the same time, you could keep a more-aggressive asset allocation in your younger child's 529 plan, accepting more risk for a potentially higher return. Many 529 plans offer "age-based" investment options that automatically make these adjustments as the beneficiary ages.

Separate accounts for your children also offer more gift-tax leeway. Since your 529 contributions are treated as gifts from you to the account beneficiary, your $15,000 (in 2018) annual gift exclusion will go twice as far with two accounts -- one for each child -- than with just one account.

Financial aid is another reason to recommend maintaining separate accounts. You wouldn't want the investments reserved for your younger child's future college expenses to count against your older child's financial aid eligibility. Be warned: The rules here are rather murky, and the impact of a sibling's 529 account may depend on the college's own policies as well on as the type of aid -- federal or institutional -- being sought.

Finally, I believe that separate 529 accounts allow for better family bookkeeping. There will never be any doubt as to your intention to help send all of your children to college. You'll avoid the uncomfortable position of being asked to explain to a curious 8th-grader why account statements are showing up in the mail with only a brother or sister's name on them. And in the event of your death or divorce, no matter how unlikely, your legal representatives and other family members will have less reason to question your actions in setting up and funding the 529 plans.

Even with separate accounts, you'll continue to have the flexibility to shift the money around in the future. You simply need to make sure that whenever funds are withdrawn from the 529 plan to pay for college they are coming from an account in the name of the child incurring the costs. It's a simple matter to change the beneficiary designation among family members at any time, transfer 529 funds between different family members' accounts or split one 529 account into two. The ability to move assets around the family is a key advantage of 529 plans when comparing other college-savings alternatives, such as Uniform Transfers to Minors Act, or UTMA, accounts.

Original Post: 2005-10-13
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Coverdell ESA vs. 529 Plan: Which to choose? (Script)

The Coverdell ESA and the 529 plan are both excellent college savings vehicles because they are both tax-free when used for college. But many families face a choice: do they use a 529 plan for all of their child's college savings, or do they use a Coverdell for the maximum amount of $2,000 each year and put any any extra savings above $2,000 into a 529 plan? In spite of its low annual contribution cap, Coverdell's are now attracting quite a few families. There are two major reasons for that. One is that only the Coverdell allows you to self-direct your investments, just like you might self-direct the investments in your IRA. The other is that in addition to college expenses, Coverdells can be withdrawn tax-free to pay for a broad range of K-12 expenses, while 529 plans are limited to K-12 tuition. This feature is appreciated most in families planning to send their children to private grade schools, which may include additional costs such as room and board or uniforms. A 529 plan, on the other hand, does not impose age limits or income limits like the Coverdell does and so overall we see a lot more money going into 529 plans than into Coverdells. Plus many savers are happy with the investment choices offered by the 529 plans and don't necessarily want to self-direct their investments. And don’t forget this: your state may be giving you a state tax deduction for using a 529 plan, but there are no states offering a state tax deduction for investing with a Coverdell ESA.

Learn more about Coverdell ESAs.

Original post date 2013-07-15
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Top 529 Plan Withdrawal Tips. (Script)

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Top 529 Plan Withdrawal Tips. (Video)

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