IRS Helps the College Bound

From www.irs.gov (to learn more):

The Internal Revenue wants to help by minimizing time spent on the completion of the Department of Education’s Free Application for Federal Student Aid (FAFSA). By using the IRS Data Retrieval Tool, applicants can automatically transfer required tax data from their federal tax returns directly to their FAFSA form.

College Planning Does Not Have To Mean Borrowing

We know that debt is not a good thing but often "good debt" is considered OK for education that provides a better job opportunity.

Options to college loans, if a 529 plan was not put in place, include using home equity, taking a loan from your 401k, accessing ROTH IRA money, or sacrificing other spending and paying as you go. Start with a 2-year community college and then consider other options including commuting from home to your local university.

Many times parents are willing to pay for an Undergraduate Degree but not a Graduate Degree. Ric Edelman has a wonderful solution to this. He suggests that the student spend less in undergraduate courses and use the savings to help fund a better graduate school. The pile of money is the same but just distributed differently.

Student Loans 2011-2012

Stafford student loans that are subsidized (meaning that the interest is deferred until after you graduate) are reduced from the 6.8% fixed rate to a low of 3.4% for 2011-2012 school years.

Something to consider is: (1) not taking on any debt of-course and paying with cash at a school you can afford or (2) going to a school you can afford but taking on some 3.4% debt and holding on to the cash, especially if it means saving your emergency fund, for example.

Your savings, though, may not beat the 3.4% cost without risk and debt always adds risk to your college payment strategy. Not good.

Planning ahead for these days obviously is the preferred approach. Plan.

529 Plan Changes

Save for retirement first before even considering saving for college. Calculate how much you need to save to reach a reasonable retirement goal (a 40 year old with no retirement savings should be saving about $1,200 per month for the next 25 years! And yes, this is just an example so see a financial planner and figure this out first).

Some state 529 plans are allowing conservative investments (like FDIC-insured CD's) but forget this as an alternative if you have more than 5 years before college either starts or ends. This will most likely not meet your desired goal.

Due to the recent market meltdown, 529 plans are also allowing investors to make more than one investment change per year and now allowing two changes per year. Another bad idea. Being able to make regular portfolio adjustments is just another opportunity for you to over-manage your account and lose sight of the long-term goal.

Besides, as Joe Hurley from www.savingforcollege.com states "...Anyone who really wants an investment change can get around the restrictions simply by coupling the investment change with a beneficiary change..." (for example, change the beneficiary to another child or yourself, make the investment change and then change the beneficiary back). Forget it though. It is unwise. Keep a long-term perspective and stay the course.

The 529 pan has tax benefits, yes, but if you have not saved enough for retirement then you should plan, instead, to either borrow (reasonably) for college costs and pay the remainder out of your current cash flow at the time college begins. How? By living off less than you make now and being prepared to fund college within your spending plan.

New offerings for 529 plans coming - oh no!

The Wall Street Journal reported on Wednesday (December 5, 2007), that:

"...Purveyors of 529 college plans are targeting more conservative savers...Virginia (one of the many examples)...is sponsoring a multi-bank 529...product (CD's and other conservative options)...that will be FDIC insured...(up to $100,000)..."

Bad idea if you are conservative but still want to save for college costs for your children or grandchildren who still have 10+ years to go. Please don't do this before talking with a CERTIFIED FINANCIAL PLANNER(tm) professional about the risks of inflation. Yes, you may keep the dollars safe from loss of principal but it will be far from safe in its ability to pay for those college costs.

Put $14,000 into a 529 plan's CD option today and that would pay for one year of tuition, books, room and board at a public college but leave it in that same CD for 10 years and it may be enough for 1 month or so of that first year's college expenses in the future. Yikes!

This is a fine idea only if you have already saved a substantial sum in a 529 plan and want to move it to a safer investment vehicle than a money market (which most plans have available) before college starts. But remember, that you will not use all of your college savings in year one if you planned properly to fund more than one year of college costs, so matching the fund investments with the liability (the year when needed) has merit too.

Oh, by the way, forget about saving for college if you have not already estimated how much you will need for retirement and are putting that aside already. College expenses may come sooner than retirement but the retirement numbers are so much larger that they need to be saved/invested for first.

College loans

Great news. Bush is very likely to sign into law this week a reduction in the interest rates on school loans from 6.8% to 3.4%. This law is in effect for the next 4 years only so...

that could be wonderful if it would be applied to existing loans as well as older ones but certainly would apply when consolidating after graduation.

Keep an eye on this rate if college loans are needed.

College Costs

Too funny: 9 steps to college preparedness:

From US NEWS AND WORLD REPORTS article: "Run the Numbers" by Kim Clark (4/8/07)

1. Find out the college's total cost of attendance.
2. Deduct grants and scholarships to calculate your out-of-pocket cost.
3. Determine what the requirements are to have a scholarship renewed for subsequent years.
4. Figure out how long it's likely to take to get a degree. Most students now need at least five years.
5. Weigh the savings from living at home for two years and going to community college vs. the chance that you won't transfer to a four-year school.
6. Decide how many hours a week you could work at a job without hurting your grades.
7. Look for last-minute scholarships with late deadlines.
8. Appeal to the college financial aid office for a better deal if your family has evidence of greater need.
9. If You're Running Behind...
   It's not too late to apply for college scholarships

College Costs - historical perspective

COLLEGE - this, like taxes and mortgages is IMPORTANT



Figures from the University of Texas last year showed that since the 1960s, the price of a public higher education has risen from about 5 percent of median family income to more than 17 percent today.

Home equity counts against some college aid forms (not FAFSA)

From Scott Noyes:

Home Equity is counted as an asset on the CSS Profile form, not the FAFSA.
Schools that use the Profile include home equity as a parent assets in the
equation. Parent assets count 5% against the eligibility amount. So if you have
$600k in home equity it knocks $30k from your eligibility. Borrowing on your
house and putting the money into an annuity may make sense depending upon the
cost of borrowing and the price of the annuity. Yes this strategy can work. Some
colleges are starting to ask about ownership of annuites or life insurance(
another dodge) but most do not. Also, most state schools and some private
schools use the FAFSA which does not require and gerrymandering.

Scott Noyes

Student loan interest

Student loan interest deduction phases out:

single: $50,000 - $65,000

married: $105,000 - $135,000

watch for this!

also, on consolidating loans:

(1) teachers, social workers may lose "forgiveness" option (or forbearance or deferment)
(2) if you add new loans to old mix, then new consolidated rate is WEIGHTED-AVERAGE (so not lowered wholesale, just some)
(3) 8.25% capped rate by federal law
(4) 2006: rates ????

UTMA's and 529 plans

While the child is a minor, the money can be used for education or other purposes that benefit the child—except for those expenses (such as food, clothing, and housing) that a parent is legally obligated to provide.

Earnings on UGMA or UTMA assets that are not held in 529 accounts are taxed at the beneficiary's rate. Moving UGMA or UTMA assets into a 529 account allows you to take advantage of the federal tax-free treatment of earnings used for qualified higher education expenses. However, there are potential disadvantages to moving UGMA or UTMA assets into a 529 account.


529 plans accept cash contributions only, so you can't transfer securities held in an UGMA or UTMA account directly to a 529 account. The securities would have to be sold, which could result in a tax liability.


All assets in a 529 account that contains UGMA or UTMA assets will be subject to UGMA/UTMA restrictions. For example, because UGMA and UTMA assets belong to the minor, the new 529 account must be used solely for that minor's benefit. You may not change the beneficiary of the account, and the beneficiary must receive control of the 529 account at the age of majority specified by the law of the state governing the account. To avoid this problem, you may want to open another (non-UGMA/UTMA) 529 account for the same beneficiary and contribute money to that account.

IF UTMA values are moved to 529 plan, then CHANGE OF OWNERSHIP form must be completed when Genny turns 21.

VIRGINIA, UTMA is up to age 21\

Liquidating UTMA now requires paying taxes on capital gains - first $850 is tax-free, next $850 is taxed at child's rate - 10%.

SERIES EE Bonds issued after 12/31/1989

http://www.publicdebt.treas.gov/

Virginia accepts UTMA's but you have to (1) CASH out the account and deposit CASH, noting so on the application. (2) must keep the money separate!!! Don't add to this 529 account once done, open another!