October 14, 2002 - College Life

Financing college is one of the most daunting aspects of attending, however it’s not so bad if you’re willing to plan. In this series of articles, we will explore ways to finance college at various stages of your life – from babyhood to post-graduation.

Your mother-to-be has the Mozart tapes playing into the womb and you decide you’re going to college at The Julliard School without your parent’s help. So how are you going to pay for it? Let’s see, a year at The Julliard School, including room and board and books and supplies is approximately $27,500. In 18 years, at 5 percent inflation, four years would be about $300,000.[i]

Before you give up, and your mom changes the tapes to “Underwater Basket-Weaving Made Easy,” let’s talk about ways you might be able to accomplish this goal.

“He who gathers money little by little makes it grow.” Proverbs 13:11 (NIV)

Does your family buy Coke products? Ever eat at Pizza Hut or shop at Wal-mart? Then you may want to sign up at UPromise (www.upromise.com) or Babymint (www.babymint.com). A portion of the money that you spend at these locations or on these products (and many others) is credited towards a college savings plan. These credits can then be transferred into a 529 savings plan (discussed later). You can even have friends and relatives sign up and use their purchases towards your account.

Admittedly, unless your shopping habits are radically different than mine, these programs won’t save enough for your entire college, but they might cover some basic costs. However, if these programs cause you to spend more (just for the rebate), it’s probably not worth it.

How much could be saved with these programs? Say your family spends $1,000 a year, and gets 3 percent in credits. That’s $30 per year for 18 years, and at a conservatively assumed rate of return of 6 percent, you would have almost $850 by the time you hit the campus.[ii] This would probably cover most of your e-book downloads when you’re a freshman.

With Coverdell Education Savings Accounts (formerly known as Education IRA accounts), your family, friends, and relatives can contribute up to $2,000 per year per beneficiary as long as the donor’s Modified Adjusted Gross Income (MAGI) does not exceed $110,000 ($190,000 if filing a joint return). Therefore, all of ninetyandnine.com’s readers are eligible to be the beneficiary and most are eligible to be the donor. I would suggest setting up the account with a discount brokerage such as TD Waterhouse (www.waterhouse.com) since TD Waterhouse has no minimums on IRA accounts, and does not charge fees to custody the assets.

Withdrawals (including earnings) are generally tax-free if used for qualified education expenses. The total per beneficiary from all sources cannot exceed $2,000 per year, and the beneficiary must be under age 18. All funds must be withdrawn by age 30.

How much can be saved? At $2,000 per year for 18 years at an assumed rate of return of 6 percent, you would have about $19,800 when the doors opened for your freshman year.[iii] This would probably cover your campus food program your entire collegiate career, but the food will taste the same as it does now.

In this program, donors (possibly your parents or grandparents) transfer money or investments into a custodial account at a bank, discount brokerage firm, or full service brokerage firm in the name of the child under the Uniform Gifts to Minors Act (UGMA). The maximum amount per donor is $11,000 ($22,000 if married) per year. Each year the earnings on the account are taxed, and (if the child is under age 14), the taxes are calculated based on the parent’s highest marginal rate.

However the biggest drawback is that once you reach the age of 18 or 21 (depending on the state), the money is yours - and if you choose to spend the entire sum on a stereo system, cars or other “must-have items,” you may never get to college!

How much can be saved? At $22,000 per year for 18 years at an assumed rate of return of 4 percent (after the assumed tax bite), you would have about $564,200 at age 18.[iv] Sorry folks, but that kind of unrestricted money in the hands of an 18 year-old scares me silly!

While 529 Plans (named after a tax code section) are available for smaller amounts, they can be used to put aside very large amounts for the benefit of the potential college student. A donor (such as your wealthy great-aunt Mabel, Uncle Joe, or even Grandma) can gift up to $55,000 ($110,000 if married) per beneficiary (effectively “pre-funding” five years worth of gifts). Almost every state has a 529 plan, but you aren’t limited to saving in either your current state’s plan or the state’s plan of the college, although there may be tax benefits to using your current state. I suggest checking out www.savingforcollege.com to do a comparison of the various state plans—looking for costs, investment choices, and other benefits.

In my opinion, 529 plans are a great alternative to the UGMA option for at least two reasons:

1. The money is taken out of the donor’s estate (for estate tax purposes), but remains under the donor’s control. Thus, if you end up not being college material, the donor can switch the beneficiary to someone else.

2. The earnings and withdrawals are tax-free if used for qualified education expenses.

However, it looks to me as though the 529 plans can only be used for accredited colleges, so most of our Apostolic Bible Schools may not qualify at this time. But in 18 years, who knows?

How much can be saved? Maximums vary by state, but at this writing South Dakota has the highest maximum with $305,000 per beneficiary.

Whatever you decide, dream big—you’ve got 18 years to save for it, even if you choose to go to an in-state university while living at home (at a cost of less than $9,000 for all four years.)[v] Now that’s a deal everyone can live with!

Glenda K. Moehlenpah, CPA, CFP® is the founder of Financial Bridges (www.FinancialBridges.com), offering Fee-Only financial planning and investment advice to people from all walks of life on an hourly, as-needed basis.

[i] Amounts shown are for purposes of illustration only. There are no guarantees that inflation will only be 5%.

[ii] Amounts shown are for purposes of illustration only. There are no guarantees that you would be able to obtain a rate of return of 6%.

[iii] Amounts shown are for purposes of illustration only. There are no guarantees that you would be able to obtain a rate of return of 6%.

[iv] Amounts shown are for purposes of illustration only. There are no guarantees that you would be able to obtain a rate of return of 6%.

[v] Amount based on assumed current cost of in-state public tuition only of approximately $810 per year, inflated at 5% annually. There are no guarantees that inflation would only be 5%.