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Financial Planning > College Planning

Clueless About College Costs

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Most parents either cant estimate or else substantially overestimate the cost of college, according to a recent study by the National Center for Educational Statistics in Washington.

College planning experts agree that exaggerated ideas about costs can discourage some boomer parents from trying to get their children into top-ranked colleges or even from trying to get them into college altogether.

NCES, a unit of the U.S. Department of Education, found that only 30% of parents of high school children actually had obtained information about what it would cost to pursue a college degree.

“Im not surprised,” says Joseph Hurley, senior partner, Bonadio & Co., Pittsford, N.Y. and founder of the Web site, “A lot of parents dont have a good grip on what college costs.”

Some give up on even trying. Thats when financial advisors need to step in, Hurley says.

“More and more families are hearing about the tax-advantaged alternatives, including 529 college savings plans and Coverdell plans,” he adds. “We see a dramatic increase in these accounts.”

529 plans are state-sponsored savings plans that exempt contributions and earnings from federal income taxes and, in many cases, from the state tax, where the buyer resides in that state. Distributions from these accounts also are exempt from federal income taxes when used to cover qualified college costs.

Coverdell accounts can be used for educational expenses from elementary school on up, not just college. However, the most that can be contributed each year per child is $2,000, compared to $11,000 for 529 plans.

“I dont know how many parents are discouraged [by exaggerated ideas of college costs], but I think that clearly does happen,” says Timothy Hayes, president, Landmark Financial Advisory Services, Pittsford, N.Y.

Hayes, who is executive director of the National Institute of Certified College Planners, says 529 and Coverdell savings plans are not the universal answer for boomers who plan to put their kids through college. To provide value to these clients, the financial advisor needs to be aware of the alternatives.

For instance, many students can qualify for financial aid or assistance, whether needs-based or merit-based, or because the college simply wants that student for some reason.

“A college might extend an offer to a student because they want someone with that mix of qualifications or from that particular demographic profile,” Hayes says.

There are also situations where a college savings plan might even be inappropriate.

Under IRS rules, a lifetime learning credit is allowed for qualified college expenses of a student, up to 20% of the taxpayers first $10,000 of such expenses.

“If theyve taken a lifetime learning credit and the tuition is $15,000 at that college, they cant draw out the $15,000 from the 529 plan because theyve already reduced their qualified educational expenses to qualify for the education credit,” Hayes explains.

Financial advisors also need to know the impact college savings plans can have on financial aid, he points out. Withdrawals could put the student over maximum income requirements, thereby excluding the student from federal loans.

A boomer also may want to consider a home equity loan to pay for college, Hayes says

“Home equity loans may make sense as long as the individual is solvent or at least has employment prospects good enough to keep them out of danger of losing their home,” Hayes says.

Interest on financial aid is only partly deductible, while home equity loan interest is fully deductible, he points out.

529s are the best choice for many high-income families, for whom the plans offer considerable tax advantages, he notes.

Where a 529 or Coverdell plan seems appropriate for someone of lesser means, the advisor may need to show the individual he can set aside a significant amount of cash.

“You need to tell them, you can make a difference,” he says. “Any money you save helps in some way. The advisors job is to help them choose investments that get the most bang for the buck.”

“If a family [in New York state] can only put away $5,000 a year, my first recommendation to them is a New York 529 because theyll get a state income tax deduction that they wont get with any other investment they choose,” he says. “That deduction is worth 7% to them. So why would they consider anything else? In a sense, youre putting another $350 in their pocket on that $5,000.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, January 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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