It’s tough to save for college when the money you put aside keeps dwindling away. With the stock market falling and tuitions rising, some parents worry their college savings plan will never work. Others may wonder whether it makes sense to invest college savings at all. How can you make sure you can pay that tuition bill — two years from now or 15 years down the road? Here’s one family that seems to have figured out the right way to save to college.
DOUG AND PATTY Dial didn’t waste any time starting a college fund for their two children.
“When they were born within 6 months, we put $15,000 into a mutual fund,” said Patty Dial. “So each child’s account started growing from 6 months onward.”
For Rachel, now 12 years old, that $15,000, invested in a stock fund, has grown to nearly $50,000. For 9-year-old Douglas, college savings put in a mutual fund that invests in a mix of stocks and bonds, has grown to about $36,000.
Still not sure these funds would be enough to cover rising tuition bills, the Florida couple decided to take $13,000 out of each child’s stash to buy contracts in the state’s prepaid tuition plan — covering four years tuition and a year of dorm expenses.
“You pay one amount and it’s done,” said certified financial planner Mary Baldwin. “It’s guaranteed and you’ve paid for college. We could have an event, we could have a war. We could have a lot of things happen, but none of that would effect the fact that the child’s tuition is paid for.”
Though they vary from state to state, Baldwin suggests parents look into state-sponsored prepaid tuition plans first — even if their child decides to go to college far away.
If tuition today is, say, $100 dollars an [credit] hour, “you’re paying for today’s tuition of $100 an hour,” said Baldwin. “If it goes up to $120, then that’s what will be given to you to take out of state or to a private Florida school. So you’re basically locking it to college inflation.”
For parents who think they may qualify for financial aid, prepaid plans may not make sense — since it could reduce an award dollar for dollar.
“If you think you might qualify for financial aid, I would suggest you keep the money in your own name as a parent,” said Kalman Chany, author of “Paying for College.”
Looking over their finances, Patty figured her kids probably could not count on financial aid to foot the bill for college costs. That’s why the Dials started saving early. Now they’re looking for vehicles with even better tax breaks. Their next step: moving the bulk of college money from custodial accounts into state-sponsored 529 plans.
“Otherwise, the child has access to the bulk of the money in the account at age 18,” said Dial. “And most kids, if they have a chance, they’d rather buy a car than go to college perhaps at 18.”
Joe Hurley, author of “The Best Way to Save for College,” says the main perk of 529 plans is that earnings grow free from federal taxes, and some states even give you a state tax deduction.
Age-based plans, in a fund which shifts from stocks to bonds as the child gets closer to college, are probably best for most parents afraid of too much risk.
“The fact that this is being done in a tax-sheltered investment means that every time you go from and equity to a fixed income investment, you’re not triggering capital gains tax that you would be if you did that on your own outside the 529 plan,” said Hurley.
Though Dial says their college funds seem sound, they’re “pretty relieved actually because we know no matter what happens to us or our money situation, it’s already taken care of. They will get to go to college.”
The Dials know that continuing to invest those savings will be the best way to offset rising college costs.
Unfortunately, income limits prevented the Dials from qualifying for two other vehicles that can deliver tax savings.
Coverdell education savings accounts let you save up to $2,000 a year for each child. Investment gains are tax free, though couples making over $190,000 or singles earning over $95,000 don’t qualify.
And starting this year, Roth IRAs allow a husband and wife to each contribute up to $3,000 a year and take out the money without paying taxes or a penalty if the funds are used for college — though you can’t use more than half of it for education.
Income limits are the same as for Coverdell accounts for those who are single and the cutoff is $150,000, if you’re married. There are no income limits on 529 plans.
Before the Dials started saving for college, they took an important step. They made sure they were putting money away for their own retirement. After all, there are no scholarships, loans or grants given to retirees.