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Dollar Signs: Saving For College

Aired August 7, 2004 - 16:30   ET


DEBORAH FEYERICK, CNN ANCHOR: Well, we certainly wish them luck.
"Dollar Signs" is straight ahead, but first, here's what's happening now in the news. Iraq's interim prime minister says the people who are responsible for ongoing violence in Najaf are not who they claim to be. Ayad Allawi insists the fighters are common criminals, not Shiite cleric Muqtada al-Sadr's Mahdi army.

The U.S. military has identified the fighters as members of al- Sadr's militia. Defense attorneys for Private First Class Lynndie England are hoping to call some big name witnesses at her military hearing. These include Vice President Dick Cheney. England is accused of abusing detainees at Iraq's Abu Ghraib Prison. No word on when the hearing officer will rule on the witness requests.

Five people are dead after two small planes collided and crashed in a backyard in northern New Jersey this morning. All the victims were onboard the plane; there were no survivors. Keeping you informed, CNN, the most trusted name in news.

Whether it's for yourself or a child, saving for college can seem like an overwhelming task. DOLLAR SIGNS is going to take your calls and your emails just ahead. Find out how and when to start saving for that college education. Send your questions to us here at, or call us at 1-800-807-2620. We'll be right back.


FEYERICK: Welcome to Dollar Signs, where we help you make the most of your money. With college costs skyrocketing, many parents worry about affording tuition for their kids. Before you take out a second mortgage on the family home, there are some things you should know about saving for college.

My guests today are going to help you with all of that and make it a lot easier. Kevin McKinley is a certified financial planner in Minneapolis, Tim Berry is Indiana state treasurer in Indianapolis. Gentlemen, thank you both for joining us here today. We'll be showing you Web sites throughout the show with all the information you need. But let's get started.

First of all, we've got one e-mail. It is from Mike in San Antonio. He says, "Is it too late to start saving for college when my daughter is starting high school this year?" What's the answer?

TIM BERRY, INDIANA STATE TREASURER: I certainly don't think it's ever too late to begin. But it's also never too early to begin as well. We're saving, my wife and I, for our two sons' future college education. We have a son who's three and a son who's eight. But also, it's never too late to begin that process.

But I also encourage not only the parents to be saving, but also to be encouraging the parents to work with their children to save as well so that they have that goal in mind of what they're saving for.

FEYERICK: Well, how much money do you have to save every day in order to be in a good position so that you're child can go to college?

BERRY: Deborah, we find that it's maybe about from birth to age 18, I would say $8 a day will cover the entire cost of a public education. Now, that's four years of instate tuition at a public school. But any dollar amount will go a long way. As a matter of fact, if parents can even save a dollar a day, that will offset $3 that a student might have to pay in student loans once she graduates from college.

FEYERICK: OK, it doesn't sound like a lot. Of course, if you're giving up your coffee, maybe it is. Here's another question. This is from Kathy in Phoenix, Arizona, and she writes, "Is it better to put money into a 529 plan for my one-year-old daughter or into my Roth IRA?" First of all, let's talk about what these two plans are, and then let's compare them. Why don't you go first, Kevin.

KEVIN MCKINLEY, CERTIFIED FINANCIAL PLANNER: Well, the 529 plan is a tax advantage college savings vehicle. The money goes in with really no tax deduction for most people, but the earnings grow tax deferred. And if they're withdrawn for qualified higher education expenses, there's no taxes whatsoever.

A Roth IRA is a very similar vehicle, except it's geared towards retirement. And if that money is withdrawn when the person retires, there's no taxes on that at all.

FEYERICK: OK, and Tim, which do you think is best to invest? To answer Kathy's question, which is better for her one-year-old at this point?

BERRY: Well, certainly, what a 529 plan can provide to a family is, one, flexibility. You can open an account in most states for as little as $100. But at the same time, you can invest up to $55,000 and receive that gift tax exemption. At the same time, you can control the assets.

A lot of parents, while we think the best of our children and have the best dreams, and hopes, and desires for them, sometimes we as parents or grandparents want to make sure that we can have control of those assets and control of that account, but also the tax treatment that is a part of the 529 plans, allowing the assets to grow tax deferred. And when those assets are withdrawn for college expenses, there is a tax exemption on those earnings as long as they are utilized for college expenditures.

FEYERICK: OK, and we have a call now. Emily from Virginia, not happy. What's going on, Emily?

EMILY FROM VIRGINIA: I put some money in an education IRA for my two boys, 7 and 12, and it is now at half its original value.

FEYERICK: So what's the answer, gentlemen? How do you fix that? How do you get back the money? That's got to be terribly disappointing, especially as you're watching to grow.

MCKINLEY: Well, it sounds like that whether this was a choice that she made on her own or through an adviser, it sounds like she may have been invested a little bit too aggressively, especially for money that's going to be needed in six years for her older child and in 11 years for her younger one.

That's a big mistake that parents make, is you have to realize that it's better to save aggressively in these types of plans than it is to invest aggressively because it's going to be used so quickly, by the time the children get in their late teens. I would advise to keep depositing and perhaps get on a systematic deposit plan, and to move into something that's a little bit more conservative.

You don't want anything that can drop 50 percent in value when college is just a few short years away.

FEYERICK: And there's really no way to get that money back, obviously. You don't want to continue some sort of more aggressive planning, as you just said.

MCKINLEY: No, absolutely not.

FEYERICK: The money's just gone, all right. What do you think is the biggest mistake, Tim, that's made in terms of investing?

BERRY: One of the advantages that many of the 529 plans provide for parents and grandparents who maybe are not as savvy with making those investments and making those investment decisions is that as the child is younger, they tend to be more heavily based in stocks and equities. But as the child grows closer to college age, they automatically move under those age-based options to more conservative investments.

And as a result, the parent doesn't have to actively be transferring those assets. And as a result, the state is making those decisions for them, helping them to move them into a more conservative investment as they get closer towards college age.

FEYERICK: OK, well, we'll be showing you Web sites throughout the show with information and ways to save for college. We'll start with two that you may want to write down, so grab a pencil. The first, and www.SavingForCollege -- that's one word -- We'll be right back with more of our calls and our emails. Send your questions to us here at, or call us, 1-800-807-2620. We'll be right back.

(COMMERCIAL BREAK) FEYERICK: Welcome back to DOLLAR SIGNS. We're talking about saving money for college with certified financial planner Kevin McKinley and Indiana State Treasurer Tim Berry. We have a caller on the phone. Dammy from New York wants to know about loans. Dammy...

CALLER: Hello.

FEYERICK: Hi. So what's your question?

DAMMY: My question is, I plan on going to college next year, and I want to know, when is the best time to start applying for financial aid and scholarships?

FEYERICK: OK, Tim, why don't you take that question.

BERRY: As you are getting ready to fill out those college applications, certainly, you will be asked to, at the same time, be filling out student aid financial aid forms. And you need to be, at this time, really researching and looking for scholarships and grants, but at the same time, at that time, when you make that decision on where you are going to attend and looking at those costs, you will need to be putting together your package, and one of those may be a loan, as you're looking at.

FEYERICK: So you really can't do anything beforehand is what you're saying. Once the college applications come, you have to fill it in. Is there any possibility that any of these plans could sort of hurt your eligibility for college loans?

MCKINLEY: No, not in terms of getting loans. It might hurt a little bit in terms of the amount of total aid granted. But one of the best places to start is a Web site called -- that's F-A- And that's the government's Web site for financial aid. Another great site to go to is -- And both of those have run throughs where people can see how much aid and what type of loans they might qualify for.

FEYERICK: OK. We have a caller, Mike, who's got a question about 529s. What's your question?

CALLER: Yes, what are some of the negatives associated with 529 plans? We hear a lot of the pros, but are there any negatives of investing in a 529 instead of going into another direction?

MCKINLEY: I'll take that. I think that 529s are an absolutely wonderful vehicle for people who are saving for college and can afford it. About the only downside, in a broader sense, is that if the money is not used for qualified higher education expenses and it needs to be withdrawn for another purpose, the withdrawer is going to have to pay taxes on the earnings plus penalties.

And so, money that is going into 529 plans should really be geared specifically for college expenses.

FEYERICK: OK, we have an e-mail. Let's get to that now. This is from Johnny in Wheaton, Illinois. And he writes, "I recently heard that students can no longer take out sufficient loans to cover college costs without parental signatures. As a parent of four children, does this mean that I would need to cosign loans for all of them?" Ouch, that could hurt. Tim, Kevin...

MCKINLEY: The amount of aid actually is limited, and most of financial aid that is awarded is really in the form of loans, not in the form of grants. But the fact of the matter is as long as you can find someone to lend the money, whether it's a bank or a private student lender, there is money available. It's a question of how much you're able to get and what the interest rate is, and the terms as well.

So there usually will be money available, but it might not be at the most favorable terms of some of the subsidized student loan programs.

FEYERICK: Now, what about this money? What happens? You've been saving all these years, you've got a big chunk of change tucked away, all of the sudden, something happens. Must it be used for college, or can it be used for other things? For example, can it be used for housing, can it be used for books, can it be used for, you know, even a car to get to college?

BERRY: It certainly can be utilized for all costs associated with higher education. So room and board, tuition, books, all of those are approved expenditures for a college education, and as a result, so you can use it for that. But with the cost rising so dramatically for college, and grants and aids not being able to keep up with those increases in college tuition, it is so important that families be thinking about saving, and not just thinking about it, but actually taking action and doing something about it and begin saving.

FEYERICK: OK, talking about savings, Dolores on the phone -- question about bonds. Go ahead.

CALLER: Hello.

FEYERICK: Hello, go ahead.

CALLER: I was wondering if I did something wrong. I bought $10,000 savings bonds for my three great grandchildren, you know, for when they go to college.

FEYERICK: When you mean something wrong, Dolores, do you mean was this the best route to go down, or what do you mean specifically?

CALLER: Was this the best route to go down?

MCKINLEY: Well, there are advantages to using savings bonds for college education. As a matter of fact, under the right qualifications, the earnings can be tax free, but the bonds have to be purchased by a parent, and they have to be used only by parents in certain income brackets.

There's nothing inherently wrong with using savings bonds. They're very safe. They're guaranteed by the United States government. They don't pay a very high rate of return because they are so safe. And when you do cash them out, you are going to have to pay taxes on the earnings. One thing I might recommend in that situation is when you're grandchildren do actually go to college that you give them the bonds, have them cash them out, and then the taxes will be at their, obviously, lower bracket than your higher bracket.

FEYERICK: OK, and just one follow up on that. When you say give them the bonds, is it just a direct transfer, or how does that work usually?

MCKINLEY: Yes, usually you just sign the bonds over, and then the children can cash them in, and then the taxes on the earnings, if they haven't been paid on a yearly basis, are taxed at the time the money is withdrawn. But the children will likely have a very low tax rate when that happens.

FEYERICK: OK. Well, we're here taking your questions. You can send them to us at You can also call us at 1- 800-807-2620. Lots of calls coming in. We will be right back with good answers.


FEYERICK: Welcome back to DOLLAR SIGNS. My guests Kevin McKinley and Tim Berry are answering your questions about saving for your child's college education. We have a phone caller, Alexandra from Florida. What's your question?

CALLER: My question is, there are some credit card companies offering, if you open a credit card with the company, they attach some kind of savings into a 529, a 1 percent, a 2 percent, and things like that. Is that something that people could look for?

FEYERICK: Kevin, I see you shaking your head. Take the question.

MCKINLEY: Well, actually, I think those are a great program to use. It basically is free money for college, as long as you're only spending money on items you already would have purchased. The danger with those programs is that if you're starting to buy things that are more expensive than you otherwise would have purchased, it becomes a wash, or worse yet, you end up actually losing money in the long run.

FEYERICK: OK. An e-mail, and it says, from Brendon in Hutton, Texas, "We've started a Coverdell and a 529 for our four-month-old son. Their grandparents would like to contribute occasionally to help. Would it be better for them to buy savings bonds..." well, we answered that part of the question... "or start another account on their own, or put money into our Coverdell or 529? Tim...

BERRY: They certainly can open an account on their own. But if they're willing to turn those assets and that control of those assets over to the parents, they can contribute to their children's 529 plan that's already there.

FEYERICK: OK, so... BERRY: So that's a great opportunity for them to do so.

FEYERICK: OK, so no problem on that. And one more email we've got from Michelle in Midland, Texas. Her question: "What is the best way to invest for college for multiple children that may provide flexibility for each child's college needs?" And that's a good question. What if you have a plan and then your child decides that they don't want to go to college? Is that money then... how does it happen? How do you tailor your plans?

BERRY: You know, one of the advantages that 529 plans can provide is that you can turn over those beneficiaries within another family member. So if one family member chooses not to go to college, or better yet, they obtain a scholarship and don't need those funds that you have saved for them, you can transfer those assets to another family member on down the line. And that's one of the flexibility advantages that 529 plans do provide.

FEYERICK: OK, and so the best way to save then, in a nutshell, for those people who just tuned in, each of you -- Kevin, what's the best way, in your opinion?

MCKINLEY: Well, I think the 529s are wonderful, but I also like parents to make sure that their current needs are covered with term life insurance and that they're also saving for their own retirement. After that, 529s and Roth IRAs are the most effective vehicles.

FEYERICK: And Tim, what's your preference?

BERRY: I certainly, as vice chair of the College Savings Plan Network, where we look to provide guidance to the 50 states in putting together the 529 plans, believe that 529 plans are a great opportunity for families. But at the same time, we need to not only encourage parents to be saving and grandparents to be helping, but also for students to be making good financial decisions, and to work with them young so that they're making that saving for college in the future a goal and an objective.

FEYERICK: OK, Tim Berry, Kevin McKinley, thank you so much for joining us. Now we all know what we have to do in the future. Thanks a lot. Well, that's all the time we have for now, but stay with CNN. Up next on "PEOPLE IN THE NEWS," Tom Cruise and the ever-elusive Oscar, plus Carly Simon on Carly Simon.

Then at 6 PM Eastern on CNN "LIVE SATURDAY," the capture of Saddam Hussein. Hear from the man who physically pulled the former Iraqi leader from his hiding place. And at 7 Eastern, the "CAPITAL GANG" is back. I'll be back, after a quick break, with today's top stories.



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