Saving for College in a Slow Economy

Savingfor college can be even more of a challenge for parents in today’seconomy.  College costs are steadily rising: public institutions areincreasing tuition as state funding dries up, while privateinstitutions are suffering from reductions in their endowments.   Ifyou are beginning to think about saving for college, keep in mind thefollowing

1. Saving for your own retirement is more important than saving for college.
Your children will have more sources of cash for college than you willhave for retirement.  Don’t sacrifice your retirement savings! Remember you can borrow for college, but you can’t borrow forretirement.

2. The sooner you start to save, the better.
Saving just a modest amount can grow if you plan ahead for time for the money to increase.
 
3. You don’t have to save the entire cost of four years of college.
Two-thirdsof college students receive some sort of financial aid. Federal, state,and private grants and loans can bridge the gap between your savingsand tuition bills, even if you think your income could be too high.  Tofind out more, fill out the Free Application for Federal Student Aid (FAFSA). College financial aid offices can be a wealth of information and support.  You might also want to contact the SC Department of Education to find out about state grants.  

4. Look at different options.
The CoverdellEducation savings Account (Education  IRA), custodial accounts, andregular investment accounts are just a few ways to save.  Among theseis the 529, an especially good way to make your money work for you.
    

How it Works:  This plan, known in South Carolina as the Future Scholar 529 College Savings Plan ,offers many advantages.  You can set up a Future Scholar account withas little as $250.   Anyone can open an account (unlike the EducationIRA) and there are no restrictions as to who can be named as abeneficiary.  You can even name yourself.  The 529 allows forcontributions of  up to $13,000 per year for a beneficiary withoutincurring federal gift taxes.

Control:  Assets in a Future Scholar accountremain in the account owner’s control for the life of the account,unlike custodial accounts.  The owner may change the beneficiary of theaccount to another family member of the original beneficiary.  Fundsfrom a Future Scholar account may be used for education expenses at anyeligible higher educational institution, not just those in SouthCarolina. 

You can control the investments in a Future Scholar account.  If youare comfortable making your own investment decisions, you can selectthe investment options from a menu, or if you prefer to put investingon automatic pilot, a good option is the age-based funds.  Theunderlying investments in age-based funds become more conservative overtime as the beneficiary nears enrollment age for college.

If the beneficiary of a Future Scholar account receives ascholarship or decides not to attend college, the beneficiary can bechanged or the assets can simply be left in the account for futureuse—graduate school or future grandchildren.  You can also withdraw theassets from the account, but the withdrawal will be subject to afederally mandated 10 percent penalty on the earnings and the earningswill be subject to federal and state taxes.

Tax Advantages:  Future Scholar accountearnings are exempt from federal and South Carolina income taxes aslong as the funds are used for qualified higher education expenses,unlike a custodial account or regular investment account.  Of course,the earlier you begin saving, the more benefits you receive.  However,the Future Scholar 529 College Saving Plan is attractive even if youonly have a few years before enrollment in college.  South Caroliniansmay be able to deduct contributions to a Future Scholar account fromtheir state income tax return even if these contributions are made in ayear that the beneficiary is attending college.  See your tax advisorfor further information.

Financial Aid:  Assets in a Future Scholaraccount are treated as an asset of the parent or other account owner indetermining eligibility for federal financial aid.  Since assets heldby the parents have less impact on eligibility than those held by thechild, this makes the Future Scholar plan an attractive alternativeover  putting funds into a custodial account for the child.

 It is never too early or too late to begin thinking about andplanning for your children’s college years. There are a variety of waysto save for college without wrecking your budget or your retirement.

G. Michael Baughman, CFP® graduated fromPresbyterian College with a BA in Business Administration in 1998 andhe earned an Executive Certificate in Financial Planning at GeorgetownUniversity in Washington, DC.  He received the CFP® designation inJune, 2009 and joined Abacus in December.   Michael’s backgroundincludes experience at The Monitor Group, McLean Virginia, FirstHorizon Bank, BB&T and SEI Investments.   At Abacus, Michael worksclosely with clients to understand their goals in order to develop andimplement a comprehensive financial plan to achieve those goals.

Michael, a native of South Carolina, grew up in Anderson.  He isvery active with Push America, an organization serving people withdisabilities. While a college student, he rode a bicycle across theUnited States, as a member of the Push team, to raise awareness andsupport for people with disabilities. 

Michael is married and he and his wife Carolyn have a two year old daughter named Ellie.