Saving for College in a Slow Economy

Saving for college can be even more of a challenge for parents in today’s economy.  College costs are steadily rising: public institutions are increasing tuition as state funding dries up, while private institutions are suffering from reductions in their endowments.   If you are beginning to think about saving for college, keep in mind the following:

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 will have for retirement.  Don’t sacrifice your retirement savings!  Remember you can borrow for college, but you can’t borrow for retirement.

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-thirds of college students receive some sort of financial aid. Federal, state, and private grants and loans can bridge the gap between your savings and tuition bills, even if you think your income could be too high.  To find 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 Coverdell Education savings Account (Education  IRA), custodial accounts, and regular investment accounts are just a few ways to save.  Among these is 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 with as little as $250.   Anyone can open an account (unlike the Education IRA) and there are no restrictions as to who can be named as a beneficiary.  You can even name yourself.  The 529 allows for contributions of  up to $13,000 per year for a beneficiary without incurring federal gift taxes.

Control:  Assets in a Future Scholar account remain in the account owner’s control for the life of the account, unlike custodial accounts.  The owner may change the beneficiary of the account to another family member of the original beneficiary.  Funds from a Future Scholar account may be used for education expenses at any eligible higher educational institution, not just those in South Carolina. 

You can control the investments in a Future Scholar account.  If you are comfortable making your own investment decisions, you can select the investment options from a menu, or if you prefer to put investing on automatic pilot, a good option is the age-based funds.  The underlying investments in age-based funds become more conservative over time as the beneficiary nears enrollment age for college.

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

Tax Advantages:  Future Scholar account earnings are exempt from federal and South Carolina income taxes as long 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 you only have a few years before enrollment in college.  South Carolinians may be able to deduct contributions to a Future Scholar account from their state income tax return even if these contributions are made in a year that the beneficiary is attending college.  See your tax advisor for further information.

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

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

G. Michael Baughman, CFP® graduated from Presbyterian College with a BA in Business Administration in 1998 and he earned an Executive Certificate in Financial Planning at Georgetown University in Washington, DC.  He received the CFP® designation in June, 2009 and joined Abacus in December.   Michael’s background includes experience at The Monitor Group, McLean Virginia, First Horizon Bank, BB&T and SEI Investments.   At Abacus, Michael works closely with clients to understand their goals in order to develop and implement a comprehensive financial plan to achieve those goals.

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

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