Keeping up with the rising cost of college, especially in the dicey economic and market environment of 2008, is nothing like the good old days.
"My father was a farmer, and when the tuition bill came, he always sold a cow," recalls Merra Lee Moffitt, a certified financial planner with Waddell & Reed in Wyomissing, Pa.
Moffitt's son now plans to attend an expensive private university, and with nary a bovine in sight, the family's college savings must get the job done. Unfortunately, too many parents who made earlier projections on rosy scenarios are now tempted to shove college savings to the back burner.
"Don't be paralyzed by the numbers on future tuition costs, for it is easy to look at current gasoline and mortgage costs and then do nothing at all," said Kalman Chany, president of Campus Consultants in New York and author of "Paying for College Without Going Broke" (Princeton Review). "Be prudent and don't put all your eggs in one basket, since people previously got burned by having too much illiquid money in dot-com and real estate markets."
College costs will likely continue upward at a 6 percent annual clip without a slowdown, warned Joseph Hurley, founder of Savingforcollege.com, a site that allows you to compare various state college-savings plans, known as 529 plans. Never assume financial aid will bail you out, he said.
"Start when the child is young," urged Hurley, author of "The Best Way to Save for College: A Complete Guide to 529 Plans" (Bonacom Publications). "If you invest $200 a month for a newborn until college, that should get you about 60 percent of the four-year cost of a public university and 25 percent of an average private college."
Invest the money in a 529 college-savings plan rather than a Uniform Transfers to Minors Act custodial account, said Moffitt. UTMA money is considered a student asset in financial aid computations, while 529 dollars are more advantageous parental assets.
"Many people don't know about 529 plans and simply go to the bank and automatically open an UTMA account," Moffitt said.
State-managed 529 plans permit tax-free distributions for qualified higher-education expenses. You can invest in any state's plan. However, the plans vary from state to state in fees and expenses, with some quite expensive.
There are also differences in performance and number of investment choices. Age-based portfolios that automatically adjust assets more conservatively as a child nears college are the simplest choice for many parents.
A 529 plan has no restrictions on income, no annual taxes on dividends and no annual limits on contributions. You can also transfer money among children. There is no federal tax deductibility, and some states offer a tax deduction or credit for all or part of your contribution to your home state's plan.
"The situation with 529 plans is somewhat convoluted because each state has its own plan and also has tax incentives to go along with it," said Marta Norton, fund analyst at Morningstar Inc. in Chicago. "You should therefore question the validity of the entire plan before you sign up because sometimes there are other features even more important than the tax deduction."
The nation's best 529 plans in terms of quality investment choices and low fees, according to a new Morningstar survey, are:
• Illinois Bright Start College Savings Program (sold direct). Program manager OppenheimerFunds offers attractive index and managed funds.
• Maryland College Investment Plan (sold direct). Program manager T. Rowe Price has an age-based portfolio of top actively managed funds.
• Virginia Education Savings Trust (sold direct) and Virginia CollegeAmerica 529 Savings Plan (broker-sold). The former offers a stellar collection of actively managed funds, and the latter offers a broad range of American Fund offerings.
• Colorado Scholars Choice College Savings Program (broker-sold). Has a sensible split of growth and value strategies with numerous outstanding fund managers.
"If the fees for a 529 plan don't stay down, it doesn't matter how well it performs, and that is why we have a balance," said Mary Morris, executive director of the Virginia College Savings Plan, which oversees that state's plans. "We make a point to offer diversity, flexibility and a great stable of portfolios."
Put college savings in the name of the parent if you harbor any chance of financial aid, said Chany. "Deciding in whose name the money should be held is most important," he said, "and under current financial aid formulas, custodial accounts and trust funds are considered student assets."
For diversity's sake, examine other vehicles. Coverdell Education Savings Accounts permit tax-free interest and withdrawals, though there are income restrictions and parents can save no more than $2,000 annually per beneficiary. Bank certificates of deposit, mutual funds and U.S. Series EE Savings Bonds are other diversification moves.
Put aside general family funds to be used for either college or retirement. Talk frankly with your child about college costs and how you can work together to meet them. Most of all, start saving for college early."I have clients creating a college plan and they aren't even pregnant yet, a good idea because it is going to cost them a lot some day," Moffitt said. "Unfortunately, there is a widening gap between the cost of college and the money a family has available."
Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, AZ 85287-4702, or by e-mail at [email protected]