Originally published 11.27.2009 at the Financial Planning Association's All Things Financial Planning Blog
College financing is a daunting task whether you are a saver, currently paying tuition, or a new graduate looking for ways to keep your new debt burden under control.
The scope of the challenge is illustrated by a recent Fidelity Investments study, which revealed that parents of children in high school are only prepared to cover 11 percent of their children’s anticipated college costs. In addition, the survey found that 43 percent of parents anticipate delaying retirement due to the rising burden of contributing to the cost of their children’s college education. And with college tuition rates typically rising faster than the inflation rate, parents and students clearly need any advantage they can find.
Here are three recent positive developments on the college funding front for savers, students and graduates:
What’s new: 529 Plan savings can be used for computers, software, and equipment for 2009 & 2010, or internet access and related services, if used by the plan’s beneficiary during a year enrolled at an eligible educational institution. If you are thinking about a new computer for your 529 beneficiary this year, you might consider making that contribution to a 529 plan first, if your state offers a tax break.
Tip: If you’re within three to five years of needing your money, consider the run up in stocks since the low point in March as an opportunity to move at least some of your funds to a more conservative allocation. 2008 served as a brutal reminder of how volatile stocks can be. Check your state’s stable investment options. If there are no investments that seek to preserve principal, see if rolling over to a prepaid contract or another 529 plan with a FDIC-insured option makes sense in your state and for your circumstances. There are differing tax implications for some strategies in particular states, so speak to your tax advisor and financial planner to see what may work for you.
What’s new: The Hope Scholarship Credit received a boost for years 2009 and 2010. Renamed the American Opportunity Tax Credit, the maximum credit allowed is $2,500 for the first four years of post-secondary education (the old limit was two years), calculated by taking 100 percent of the first $2,000 plus 25 percent of the next $2,000 of eligible expenses. Also, keep receipts for your expenditures on books and course materials, because they qualify.
Tip: Whether or not you can take a tax credit depends on a number of factors. Coordinate your tax and financial planning strategies over your income tax returns to maximize your family’s credit.
What's new: If you are struggling to pay back your federal loans, a new payment schedule may be a smart move. Income Based Repayments (IBR) allow you to base your payments on the amount of your income, instead of a standard “one-size-fits-all” formula on the size of the loan.
The downsides are extra reporting, not all loans qualify, and the interest may accrue at a higher amount than the loan payment – so, the possibility exists that your loan’s principal balance can grow while in repayment. But the upside of not having student loans that become a burden when you are struggling to start out may just be worthwhile. IBR repayment schedules can also qualify for loan forgiveness if the loan isn’t paid off after 25 years (10 years for certain public sector jobs).
Tip: Wonder if you should be paying down student loans, other debts, or saving for the future? This is a fairly personal topic, but if your employer offers a match to your retirement savings plan, try to take advantage of it before paying too much extra on debt. You may be able to use the IBR to help with the monthly cash crunch.
Even with all of the new rules, 2010 will surely bring even more changes to the college financing landscape. The Treasury Department in September issued a report to the Middle Class Task Force for recommended 529 plan changes, and Treasury is continuing to look at changes that may alter the 529 landscape. Looking forward, Congress has several pieces of proposed legislation that could also fundamentally change the best ways to finance college.
Aside from retirement, your college savings plan is one of the largest savings goals you may have. A comprehensive plan that keeps up with the ever changing college financing rules is another area a CERTIFIED FINANCIAL PLANNER™ can add value to your financial picture.