FIRST MIDWEST FINANCIAL NETWORK – HIGHER EDUCATION PLANNING

There is no time like the present. Your Financial Consultant can help you get started with a college savings plan that puts your children or grandchildren on a path to higher education.

• As with planning for most other financial life events, you need to do the math. There are tools to help you estimate the cost of a four-year public or private college education, adjusted for inflation, based on the child’s current age.
• You’ll need to decide how much of this cost is realistic for you to save on a monthly or annual basis, and write that into your budget, perhaps as an automatic deduction to keep your plan on track.
• Depending on the child’s age and when you start, college savings may be a short-term (less than three years), medium-term (three to ten years), or long-term (ten plus years) goal. You’ll want to match your college savings plan to the appropriate time horizon.

When you have at least eight to ten years for college savings to build, you may want to consider investment vehicles that have historically offered the highest returns.⁵ As the child grows closer to college age, assets should be gradually shifted into more conservative instruments. Your Financial Consultant can help you craft a savings and investment plan to help from birth to college.

There are three types of accounts that are frequently used for funding college, each with specific advantages and drawbacks. Your Financial Consultant can help you determine which of these plans is suitable for your family.

• Coverdell Education Savings Accounts (ESAs) – This account provides advantages such as investment flexibility (you can choose how the money is invested), tax-deferred growth and tax-free withdrawals.³ However, contributions are limited to $2,000 per year and these accounts are only open to investors with a modified adjusted gross income under $110,000 for singles and $220,000 for couples filing jointly.
• Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA)⁴ – These custodial accounts are controlled by the custodian, typically a parent, and must be used for the minor child’s benefit. Deposits to a custodial account are considered an irrevocable gift. One disadvantage to custodial accounts is that the child gains legal control of the assets at age 18 or 21, depending on the state, and may choose not to use the money for college. Because assets are in the child’s name, another disadvantage is that these assets can affect the child’s eligibility for financial aid.
• 529 plans² – Named after Section 529 of the Internal Revenue Code, 529 Plans are administered by individual states, which determine the plans’ structures and investment options. Withdrawals from these accounts for qualified education expenses are tax-free. There are two types of 529 plans: prepaid tuition and savings. Prepaid tuition plans are currently available in several states, including Illinois, and allow for the pre-purchase of tuition based on today’s rates. While most plans allow investors from out of state, there can be significant state tax advantages and other benefits to investing in your own state’s 529 plan. However, contribution limits and other rules vary by state, so it pays to investigate your options.

When parents have limited income and assets and must choose between saving for retirement or saving for their child’s higher education, financial experts generally recommend funding retirement accounts first. While this may sound selfish, there are good arguments for making this choice:

• Other resources exist for funding a college education such as student loans, grants and scholarships. Graduates can take many years to pay off their student loans, and these loans often carry lower interest rates than other loan vehicles.
• On the other hand, if you don’t have personal savings or investment income, limited options exist for retirees. Most must then survive on limited Social Security benefits or even continue working to make ends meet. Another option could be depending on family for assistance.

Sometimes, no matter how well you plan, you may still come up short when it’s time to start paying for college. If so, you may want to consider these options:

• Your child can attend a more affordable community college for the first year or two, then transfer to a public or private four-year institution. It’s wise to check with both schools in advance about course prerequisites, transfer credits and other requirements.
• If you have significant equity in your home you may want to consider refinancing your mortgage with a cash-out option or secure a home equity line of credit to obtain money for college expenses.
• Encourage your child to get a part-time job and/or work during summers to earn money toward their own college expenses.