Many families are checking their mailboxes constantly these days.
Letters of acceptance from colleges are being received by high school seniors, with information on housing options following closely behind. Most families have already dutifully filed their financial aid applications.
Unfortunately, parents of college-bound youngsters find themselves between a rock and a hard place in 2002:
– The value of their investments earmarked for education has declined, due mainly to the drop in the stock market.
– College costs are on the rise because schools feel the bite of a weak economy, reduced revenue and their own devalued investments.
In-state tuition and fees for public four-year colleges increased an average of 7.7 percent over the past year, to $3,754, a jump from the 4 percent increases of recent years. Tuition at private colleges increased 5.5 percent, to $17,123, according to the College Board.
Federal student loan volume has doubled over the past decade, with the largest increases in middle- and upper-income families. The sooner you put money aside and understand recent changes in college investment options, the more likely it is your family can avoid financial trauma.
“My wife, Melissa, and I have contributed $100 a month to a mutual fund for our son Jack since he was born three years ago, and our goal is to cover $45,000 worth of his tuition,” said Tom Springer, a tax accountant in Valley Park, Mo. “We’d been supposing an 8 percent annual return, which now seems unrealistic, so we’re going to contribute to a 529 plan as well.”
The 529 college savings plans sponsored by individual states have undergone positive changes. Administered by investment companies, they permit you to put aside a maximum of $100,000 to $250,000, depending on the state, to pay for public or private college. Formerly taxed at the child’s rate, 529 plan earnings are now forever free from federal tax and a number of states also offer tax deductions, as long as money goes to qualified college expenses.
Dollars can be used at any college and you can pick any plan. You can roll your account into a different plan once every 12 months and reallocate funds to different investment categories once a year as well. However, 529 plans vary in investments offered, performance and expenses, and by committing to them you do relinquish some control. The Web site www.savingforcollege.com details each state plan.
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“It’s noteworthy that the annual limit for the tax-free Education IRA, renamed the Coverdell Education Savings Account, has been increased to $2,000 (though this depends on the parents’ income) from the previous $500,” said Kalman Chany, president of New York-based Campus Consultants and author of “Paying for College Without Going Broke” from Random House/Princeton Review Publishing.
That account lets you choose any investment, Chany noted. As with 529 plans, there are penalties for using money for anything but education.
“The No. 1 false impression of parents is that saving for their child’s education isn’t a good idea because it will adversely affect financial aid,” said Joseph Russo, director of financial aid for the University of Notre Dame, who urges all parents to learn each school’s aid deadlines and adhere to them. “The No. 2 false impression is that simply demonstrating you need financial help automatically means you’ll get that help.”
While 75 percent of Notre Dame undergraduates receive some form of financial aid, the trend everywhere is toward more loans and fewer scholarships. Changes in 529 plans and Education IRAs make traditional Uniform Transfers to Minors Act accounts less attractive. Under UTMA, the first $750 in interest income is tax-free until your child turns 14; the next $750 taxed at the child’s 15 percent rate; and any amount above that taxed at the parents’ rate until the child turns 14. When youngsters reach the age of majority, they have control of the money.
Cheny believes no money should be put in a child’s name if a family harbors realistic hopes of receiving financial aid.
“It’s important that for 2002 you’ll be able to deduct $3,000 worth of tuition expenses `above the line,’ which means you don’t have to itemize to take the deduction,” said Art Ford, a CPA with Sullivan Bille in Tewksbury, Mass. “Single individuals with income of up to $65,000 or married couples with income up to $130,000 qualify.”
Prepaid tuition plans, which let you lock in a tuition price by paying in advance, are growing in popularity. That and all tax implications of college investing should be examined with a qualified tax consultant. Start investing right away.