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CNN Live Saturday
"Dollar Signs": Saving For You Child's College
Aired August 09, 2003 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
WHITFIELD: Welcome now to "Dollar Signs" where we like to help you make the most of your money. Today, we want to address something every parent worries about, saving for their kids' education. Our Ali Velshi says there is a tool to help. Just remember three little numbers, 529.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN CORRESPONDENT (voice-over): When you're saving for your kids' college educations, tax breaks like this so-called 529 plan can go a long way in helping rack up the cash. A 529 works like a Roth IRA. You contribute money you've already paid taxes on.
JOSEPH HURLEY, SAVINGFORCOLLEGE.COM: You set up the account and you name someone, typically your child or your grandchild as beneficiary and you start making contributions into that account. Your money is then invested, depending on which option you choose within that program and then over time it grows and when it comes time to take the money out for college you simply withdraw the funds without having to pay any federal income tax on the money.
VELSHI: In fact, depending on where you live your contributions and earnings may also be state tax deductible. The money can be used for tuition, books, and in some cases room and board. But many parents why these state-run plans are better than just saving on their own.
Let's say you invested just $2,000 a year for 18 years. Assuming a six percent rate of return outside a tax sheltered plan like a 529 you would have nearly $55,000 after tax. If you invested that money inside a 529 plan, your tax benefit would increase your total savings to $61,000, that's 12 percent better or nearly $7,000...
VELSHI: ...have nearly $55,000 after tax. If you invested that money inside a 529 plan, your tax benefit would increase your total savings to $61,000, that's 12 percent better or nearly $7,000.
Still, there are complications like choice, 529s are essentially mutual funds sold through banks and brokers. They have expenses and management fees and fund performance varies depending on the stocks or bonds the fund chooses.
DOUG STIVES, CURCHIN GROUP: The good news is, is with so many 529 plans out there all across the country, there are now over 100 plans, you generally can find something that will meet with your risk tolerance and your expectations.
VELSHI: All states offer at least one version of the 529 plan but you're generally not limited to investing in your home state's plan and where you invest has no bearing on where your child eventually goes to school, but there can be a downside to investing out of state.
HURLEY: Everyone really should look at their in state program because a majority of the states actually offer an upfront state income tax deduction if you use that state's program.
VELSHI: Some states even penalize you for investing in a 529 plan of another state. And, one final caution, if you are counting on financial aid to cover some college expenses, assets in a 529 account could disqualify you from some of that.
(on camera): Now, there are other tax advantaged college savings options. One of them is the Coverdale Education Savings Account. It allows you to put $2,000 away per year. That will help with a public education.
It's not going to be enough to pay for a private education. Some states offer prepaid college tuition plans but if you buy one of those make sure that your child is prepared to go to college in state.
Ali Velshi, CNN Financial News, New York.
(END VIDEOTAPE)
WHIFIELD: Hopefully that's given you a little food for thought because soon we're going to be taking your e-mails and taking your phone calls too on that very topic.
And, before we go to a break we want to remind you that we are waiting for California Governor Gray Davis to walk into that room right there in Santa Monica at the Venice Family Clinic where he will be signing some landmark legislation banning chemicals that ordinarily believed to harm nursing mothers and unborn children.
He's still very much trying to persuade the California voters out there that he is working for the people and that he wants to keep his job even though today, much of today, was kind of upstaged by other candidates who were officially throwing their hats into the ring by filing their papers today in California for the recall election.
And, of course, when Governor Davis walks into the room and signs that legislation and perhaps says a few words we'll be taking that for you live right here on CNN.
For now we're going to take a short break. We'll be right back with your e-mails and your telephone calls on saving for your kids' college.
(COMMERCIAL BREAK) WHITFIELD: All right, we're ready to begin our "Dollar Signs" segment and, of course, today's topic is saving for your kids' college. It's probably one of the toughest things that a parent can do and to help us sort out all the options CPA Joe Hurley from savingforcollege.com and he joins us from Rochester, New York. And, that is the toughest thing for a parent, Joe, to decide on when they start saving for their kids. It is as soon as the kid is born?
HURLEY: I would say so. College is a big expense coming at your down the road so the sooner you get started certainly the better off you're going to be but that's not to say that if you have a child who's older that you should just give up and not save at all. Any time that you have the ability to put funds aside for college I think you should start saving.
WHITFIELD: Every little bit helps.
HURLEY: Sure does.
WHITFIELD: All right, we're encouraging people to call in as well as send your e-mails about any kinds of questions and I think we already have one e-mail that's now in, and this coming from Tom in Connecticut.
"I invest in Connecticut's 529 plan. It's managed by TIAA-CREF I am not sure if I should be in the age-based type fund or something more aggressive. My girls are two and seven years old."
So, what kind of advice can you give Tom?
HURLEY: Well, let me first explain what this age-based fund is because a lot of the 529 plans have this. This is an option that invests your dollars more aggressively when the children are young primarily in equities and then as the child gets closer to college age it gradually shifts into more conservative investments like bonds and money markets.
So, for a lot of families that's a very good option to choose because you really don't want your money at risk when your child is older yet while your child is still young you want to have the upside of the stock market, so I think that unless you have a reason to go away from the age-based option into something that stays static over the life of the account you're in good hands I would say with that age-based option.
WHITFIELD: All right, and on the telephone with us is Cindy in California, as if she doesn't already have enough on her plate now thinking about the recall election out there but instead she's thinking instead right now about her kids and saving. Cindy, what's your question?
CINDY: I'd like to know how much I would need for the future? What is educational inflation today?
HURLEY: Well, there's a wide range of expenses. If you look at the average public institution you're talking about $10,000 in round numbers every year for each of the four years. The average private college is more like $25,000 and the average elite private college is as much as $35,000 per year.
And then, if you look at how much these costs are increasing each year, I would say you'd have to project five percent or so annual increase in those costs. The public schools are going up even faster right now because, of course, public tuition is more affected by state budgets and state politics and right now those items are causing some public tuitions to go up by double digit amounts.
WHITFIELD: And, Joe, what about for the parent out there who has their children in private school, not necessarily because they really can afford it and they're wealthy but because they really have no other options they feel. At the same time they got to continue to somehow plan for college.
What's the recommendation for a parent who already feels like they're putting out thousands of dollars for school each year and then they got to plan for the future too?
HURLEY: Well, you really have to do the best you can. I mean you're making a choice to have your children in private school which, as you say, is very expensive and then when it comes time to go to college you know you really have a number of places where that money will come from.
Hopefully, you'll have some savings and, if you don't have enough savings, then you turn to loans, student loans. The majority of students in college right now are dependent, at least in part, on student loans and those loans are at very low interest rates now.
So, the whole idea of college planning is to take a look at all the different sources of money for college and then try to put those together either now or actually when it gets closer to college age so that you can juggle all that and get your college - get your child through college without coming away with too much debt.
WHITFIELD: All right, Joe, we've got another e-mail, this from Badri and let's see that e-mail. Badri says: "I am currently single but plan to have a family in the future. Can I start contributing to any tax-sheltered plans toward my future children's education right away or do I have to wait until they actually materialize?" Good question.
HURLEY: That is a good question because you, in fact, can start right away. With the 529 plans, a lot of people don't know this.
WHITFIELD: Really?
HURLEY: Yes, you can set up an account for yourself, naming yourself as the beneficiary and then when the child comes along you can simply change the beneficiary from yourself to that child. So, it's really a great way to get money growing in a tax-deferred investment by setting up that 529 account right now.
WHITFIELD: Wow, that's some great planning and foresight for certain. But now what if you've got your 529 and you've been planning for it and say your child is now 18 or 19 or 20 and decides I don't want to go to college, what happens to all that money that you've saved?
HURLEY: Well, you have a few options. The first option you have is to change the beneficiary on that account. If you have a younger child that is still in high school or in grade school and you might need the money for that child, you can simply switch beneficiaries and target that money for the next child. Another option that you have is to take the money out. You don't need it. You want to use it for other things; however...
WHITFIELD: But there are great penalties, right?
HURLEY: Well, there are penalties. If you take the money out and it's not used for college then you'll be paying income tax on the earnings.
WHITFIELD: Wow.
HURLEY: Or you'll be paying a ten percent penalty on those earnings.
WHITFIELD: Boy, better find a niece or a nephew or somebody who could benefit.
HURLEY: Well, you should. Your last option is to do nothing. You can just keep that account growing and maybe you'll have grandchildren in the future and that's when you actually use the money for college.
WHITFIELD: All right, good advice. All right, Joe Hurley don't go away because we're going to continue this conversation but, for now, we're going to take a short break.
(COMMERCIAL BREAK)
WHITFIELD: Well, welcome back to DOLLAR SIGNS. We're answering your questions about saving money for your kids' college. Sharing his wisdom with us is Joe Hurley from savingforcollege.com. Thanks for sticking around.
We also have an e-mail in. I'm sorry, we've got someone on the telephone from Virginia, Hertha who's got a question or comment - Hertha.
HERTHA: Hello.
WHITFIELD: Yes, what's your question or comment?
HERTHA: My question is about the financial aid packages that a lot of these colleges offer and when they do I know they take into account the money that the parents have, the money that the child has, and they seem to want to use more - they count more of the child's money than the parent's money. My question is about the 529 as to whether that's - when a college does that in figuring the financial aid do they consider the 529 money as the parents' money or the child's money?
HURLEY: Well, I have some good news for you. For federal financial aid purposes it's considered the parents' money, so it's assessed at a lower rate than if it were the child's money.
That's good news but you also have to know that colleges when they're doling out their own dollars can use whatever formula they want and in some colleges now they will consider all the money the same, whether it's the parents' money or the child's money. But right now, I would say 529 plans are treated favorably for federal financial aid purposes.
WHITFIELD: All right, thanks Hertha.
Now, Joe, is there anyone for whom a 529 is not good?
HURLEY: Yes, there are a category of people that it's not the best for. Certainly if you're investment style is day trading, if you're an active trader and you really don't want the restrictions of a 529 because in a 529 you're limited to a menu of options that the program provides and then you can change your selection but only once ever year.
That type of person might not be all that thrilled with a 529 and you also have to realize there are a lot of other options out there, the Coverdale Education Savings Account is a good option for some families in saving for college, even using taxable accounts, putting money in your child's name in a uniform gift to minors act account. That can work at least for a limited amount of money.
WHITFIELD: All right, now Eric has an e-mail question. Let's take a look at that.
He says: "My son is 16 months old now. When he was born, I started a 529 college savings plan for him. I put away $100 a month. Is this going to be enough and what are the pros and cons" that from Eric in New York, Joe?
HURLEY: Well, $100 per month is probably not enough right now to meet your college savings goal, at least not 100 percent of your college savings goal but it's certainly a good start and what you'll find is that many young parents as time goes on their incomes are going to go up too and they'll be able to afford higher college savings in the future. So, I think you're off to a good start just keep it going and when you're able to put more money into dedicated college savings accounts begin to do that.
WHITFIELD: All right, Joe, and John in Florida is on the line with us - John.
JOHN: I have a question. I live in Florida and I have four grandchildren. If I invest in the fund am I at risk for the fund losing money besides my investment in a particular area of mutual funds?
HURLEY: Well, certainly if you use the 529 savings plan in Florida your account is going to go up or down depending on the performance of the underlying investments.
You have to realize that risk just like any other investor. Florida also has a very popular prepaid tuition plan and in that event your prepaid tuition dollars are going to go up in value the same as tuition inflation goes up in Florida and you won't lose money in that particular program.
So, you really have to look at both those options and decide whether the prepaid program is better for you, the savings program, or you can even do a combination of both.
WHITFIELD: All right, Ernesto in New York also has a question for you via e-mail. "Which investment brings more returns for my child, mutual funds or savings plans?" You may have already in part answered that.
HURLEY: Well, I have because savings plans in effect are mutual funds. They invest in mutual funds and so when you choose a savings plan in large part you're selecting the mutual funds that are within that plan. There are some additional expenses that the 529 plan charges so it's not the exact same return as the mutual fund but it's in essence working the same way.
WHITFIELD: All right and this from Barb. "I'm a big believer in saving early for my kids' college education but why doesn't anyone ever mention saving early for daycare expenses? My daycare costs are higher than tuition costs at the University of Washington."
HURLEY: Well, that's a good question. Actually, when you're saving for any purpose you really have to look at your entire financial picture. You know a lot of times when we're talking about saving for college, we're also looking at retirement too.
You have to save for your own retirement at the same time you're saving for college, so it really becomes a more complicated process and you really do have to consider the entire budget, the entire home budget when you're figuring out exactly what you want to do.
WHITFIELD: Boy, that sort of goes along the lines of the whole private school, you know you're paying for private school for your kids and then you still have to continue to save for college.
Now, Linda in New York is on the telephone with us and, Linda, what's your question?
LINDA: Well, I unfortunately have waited a little too long. Now, I have a child who's a sophomore in high school and I want to know what, if anything, is the best I can do for the next few years?
HURLEY: Well, over the next few years if your child is older you probably don't want to take a lot of risk with your investments because anyone who has done that within the last three or four years knows that those stock investments have gone down.
So, I would encourage you to definitely look into the 529 plans and look into Coverdale Education Savings Accounts. Now, if you're in New York, realize that New York is one of the those states that offers you a tax deduction for contributions into its 529 plan.
So, you can take off as much as $10,000 from your New York income taxes by investing in that program. That's the amount of income. The actual tax savings is more like $500, $600.
And so, even if your child is in college you can still get that tax deduction even if you're only putting the money into the program and then taking it out very shortly to pay those college expenses and a lot of people don't realize that state tax savings is sitting there waiting for you, but I would encourage you to look in that direction.
WHITFIELD: And, Joe, isn't it true, though, that some of those state tax incentives just might not measure up for everyone however. There may be some kind of hidden fees or perhaps, you know, there aren't any earnings - the earnings just aren't great enough in the long run.
HURLEY: Well, true. The actual investment performance of your 529 plan is likely to outweigh the value of state tax deductions but the state tax deduction is certain. You're actually going to get that amount of benefit. But take a look, you know.
If the dollars are not significant you will want to shop for 529 plans around the country. Don't necessarily stay with your state's program if you think there's another 529 plan from another state that's better for you realizing that it doesn't make any difference where you send your child to college. You're going to get the same benefit from a federal tax standpoint no matter which state or which college your child goes to.
WHITFIELD: All right, Jennifer in Kentucky has this question. "As a college student I'm always on a tight budget. What are your recommendations for a college student wanting to get started in investing?" I guess investing for her further education, I'm hoping.
HURLEY: Well, I would say to start checking around. There are a lot of resources to help families, including students, get a start on investing on the Internet. There are a lot of resources in your local library. There are a lot of books and so I can't sit here and tell you exactly which resource to use but I would certainly encourage anyone who wants to get started on investing to do some of that research and check out what your options are.
WHITFIELD: All right, Michael is on the phone with his question - Michael.
MICHAEL: My question is about the tax free status after the year 2010. I have a two-month-old at home. I'm considering whether to invest in a 529 plan but I've heard that seven years from now there may be some changes in the federal laws. Do you have any comment or information about that? HURLEY: Well, you're certainly not the only one wondering about that because, as you know and others might not know, withdrawals from a 529 plan through the year 2010 are tax free but then that tax exclusion expires and withdrawals after 2010 become taxable to the student.
I certainly believe that Congress will extend the tax exclusion for 529 plans and most people also believe that but I can't guarantee it. The only other thing I can say is even if it reverts to prior law where the earnings come out taxable they will come out taxable to your child at a low tax bracket and your child will probably have tax credits to offset any liability.
So, in effect, for most families it's going to be tax free anyway but we just have to wait and see what happens with the law and whether it actually is extended beyond 2010.
WHITFIELD: Now, Barb has this question. "Is there any hope when we haven't saved and qualify for little based on income? We have a daughter who is a high school senior and a son starting high school." What hope does she have or what advice?
HURLEY: Well, the advice is to really look at your alternatives in coming up with other dollars for college. Scholarships, you should go on a scholarship hunt and see what types of scholarships might be available for your child. Even the local organizations may be offering scholarships that you can find. Many, many dollars are given out in scholarships every year and that's a great way to get money because you don't have to pay it back.
Your other alternative is to take out student loans to pay for college expenses. Naturally you have to pay back those student loans so that's not quite as good but certainly they're available for most families and if that's what you need to do to get your child into a good college, that's I think what your other major option is.
WHITFIELD: And, Joe, other than the scholarships, are there other things that kids can do to help themselves save some money quickly?
HURLEY: Well, one thing they can do is get a job. Certainly, a lot of students are working during their high school years, working through their college years to help pay for their own expenses.
WHITFIELD: All right.
HURLEY: And certainly you don't want a child working full time because that takes away from their studies but those dollars are certainly going to help pay the bills.
WHITFIELD: All right, Joe Hurley of savingforcollege.com and more notably the author of "The Best way to Save for College" for more tips on the complete guide to 529 plans. Thanks so much for joining us and being with us for the last 30 minutes answering all those questions.
HURLEY: It's been a pleasure.
WHITFIELD: Well, CNN has got the muscle this evening.
Arnold Schwarzenegger and Kobe Bryant are profiled next on "PEOPLE IN THE NEWS."
Then, at 6:00 Eastern Time, hard-hitting analysis of the California recall on "CNN LIVE SATURDAY."
And, settle in for some tough talk with "THE CAPITAL GANG" at 7:00 Eastern, and I'll be back with the headlines right after this short break. Stay with us.
(COMMERCIAL BREAK)
WHITFIELD: Hello, I'm Fredricka Whitfield. Arnold Schwarzenegger and Kobe Bryant are profiled next on "PEOPLE IN THE NEWS" but first here's what's happening at this hour.
(NEWSBREAK)
TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com
Aired August 9, 2003 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
WHITFIELD: Welcome now to "Dollar Signs" where we like to help you make the most of your money. Today, we want to address something every parent worries about, saving for their kids' education. Our Ali Velshi says there is a tool to help. Just remember three little numbers, 529.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN CORRESPONDENT (voice-over): When you're saving for your kids' college educations, tax breaks like this so-called 529 plan can go a long way in helping rack up the cash. A 529 works like a Roth IRA. You contribute money you've already paid taxes on.
JOSEPH HURLEY, SAVINGFORCOLLEGE.COM: You set up the account and you name someone, typically your child or your grandchild as beneficiary and you start making contributions into that account. Your money is then invested, depending on which option you choose within that program and then over time it grows and when it comes time to take the money out for college you simply withdraw the funds without having to pay any federal income tax on the money.
VELSHI: In fact, depending on where you live your contributions and earnings may also be state tax deductible. The money can be used for tuition, books, and in some cases room and board. But many parents why these state-run plans are better than just saving on their own.
Let's say you invested just $2,000 a year for 18 years. Assuming a six percent rate of return outside a tax sheltered plan like a 529 you would have nearly $55,000 after tax. If you invested that money inside a 529 plan, your tax benefit would increase your total savings to $61,000, that's 12 percent better or nearly $7,000...
VELSHI: ...have nearly $55,000 after tax. If you invested that money inside a 529 plan, your tax benefit would increase your total savings to $61,000, that's 12 percent better or nearly $7,000.
Still, there are complications like choice, 529s are essentially mutual funds sold through banks and brokers. They have expenses and management fees and fund performance varies depending on the stocks or bonds the fund chooses.
DOUG STIVES, CURCHIN GROUP: The good news is, is with so many 529 plans out there all across the country, there are now over 100 plans, you generally can find something that will meet with your risk tolerance and your expectations.
VELSHI: All states offer at least one version of the 529 plan but you're generally not limited to investing in your home state's plan and where you invest has no bearing on where your child eventually goes to school, but there can be a downside to investing out of state.
HURLEY: Everyone really should look at their in state program because a majority of the states actually offer an upfront state income tax deduction if you use that state's program.
VELSHI: Some states even penalize you for investing in a 529 plan of another state. And, one final caution, if you are counting on financial aid to cover some college expenses, assets in a 529 account could disqualify you from some of that.
(on camera): Now, there are other tax advantaged college savings options. One of them is the Coverdale Education Savings Account. It allows you to put $2,000 away per year. That will help with a public education.
It's not going to be enough to pay for a private education. Some states offer prepaid college tuition plans but if you buy one of those make sure that your child is prepared to go to college in state.
Ali Velshi, CNN Financial News, New York.
(END VIDEOTAPE)
WHIFIELD: Hopefully that's given you a little food for thought because soon we're going to be taking your e-mails and taking your phone calls too on that very topic.
And, before we go to a break we want to remind you that we are waiting for California Governor Gray Davis to walk into that room right there in Santa Monica at the Venice Family Clinic where he will be signing some landmark legislation banning chemicals that ordinarily believed to harm nursing mothers and unborn children.
He's still very much trying to persuade the California voters out there that he is working for the people and that he wants to keep his job even though today, much of today, was kind of upstaged by other candidates who were officially throwing their hats into the ring by filing their papers today in California for the recall election.
And, of course, when Governor Davis walks into the room and signs that legislation and perhaps says a few words we'll be taking that for you live right here on CNN.
For now we're going to take a short break. We'll be right back with your e-mails and your telephone calls on saving for your kids' college.
(COMMERCIAL BREAK) WHITFIELD: All right, we're ready to begin our "Dollar Signs" segment and, of course, today's topic is saving for your kids' college. It's probably one of the toughest things that a parent can do and to help us sort out all the options CPA Joe Hurley from savingforcollege.com and he joins us from Rochester, New York. And, that is the toughest thing for a parent, Joe, to decide on when they start saving for their kids. It is as soon as the kid is born?
HURLEY: I would say so. College is a big expense coming at your down the road so the sooner you get started certainly the better off you're going to be but that's not to say that if you have a child who's older that you should just give up and not save at all. Any time that you have the ability to put funds aside for college I think you should start saving.
WHITFIELD: Every little bit helps.
HURLEY: Sure does.
WHITFIELD: All right, we're encouraging people to call in as well as send your e-mails about any kinds of questions and I think we already have one e-mail that's now in, and this coming from Tom in Connecticut.
"I invest in Connecticut's 529 plan. It's managed by TIAA-CREF I am not sure if I should be in the age-based type fund or something more aggressive. My girls are two and seven years old."
So, what kind of advice can you give Tom?
HURLEY: Well, let me first explain what this age-based fund is because a lot of the 529 plans have this. This is an option that invests your dollars more aggressively when the children are young primarily in equities and then as the child gets closer to college age it gradually shifts into more conservative investments like bonds and money markets.
So, for a lot of families that's a very good option to choose because you really don't want your money at risk when your child is older yet while your child is still young you want to have the upside of the stock market, so I think that unless you have a reason to go away from the age-based option into something that stays static over the life of the account you're in good hands I would say with that age-based option.
WHITFIELD: All right, and on the telephone with us is Cindy in California, as if she doesn't already have enough on her plate now thinking about the recall election out there but instead she's thinking instead right now about her kids and saving. Cindy, what's your question?
CINDY: I'd like to know how much I would need for the future? What is educational inflation today?
HURLEY: Well, there's a wide range of expenses. If you look at the average public institution you're talking about $10,000 in round numbers every year for each of the four years. The average private college is more like $25,000 and the average elite private college is as much as $35,000 per year.
And then, if you look at how much these costs are increasing each year, I would say you'd have to project five percent or so annual increase in those costs. The public schools are going up even faster right now because, of course, public tuition is more affected by state budgets and state politics and right now those items are causing some public tuitions to go up by double digit amounts.
WHITFIELD: And, Joe, what about for the parent out there who has their children in private school, not necessarily because they really can afford it and they're wealthy but because they really have no other options they feel. At the same time they got to continue to somehow plan for college.
What's the recommendation for a parent who already feels like they're putting out thousands of dollars for school each year and then they got to plan for the future too?
HURLEY: Well, you really have to do the best you can. I mean you're making a choice to have your children in private school which, as you say, is very expensive and then when it comes time to go to college you know you really have a number of places where that money will come from.
Hopefully, you'll have some savings and, if you don't have enough savings, then you turn to loans, student loans. The majority of students in college right now are dependent, at least in part, on student loans and those loans are at very low interest rates now.
So, the whole idea of college planning is to take a look at all the different sources of money for college and then try to put those together either now or actually when it gets closer to college age so that you can juggle all that and get your college - get your child through college without coming away with too much debt.
WHITFIELD: All right, Joe, we've got another e-mail, this from Badri and let's see that e-mail. Badri says: "I am currently single but plan to have a family in the future. Can I start contributing to any tax-sheltered plans toward my future children's education right away or do I have to wait until they actually materialize?" Good question.
HURLEY: That is a good question because you, in fact, can start right away. With the 529 plans, a lot of people don't know this.
WHITFIELD: Really?
HURLEY: Yes, you can set up an account for yourself, naming yourself as the beneficiary and then when the child comes along you can simply change the beneficiary from yourself to that child. So, it's really a great way to get money growing in a tax-deferred investment by setting up that 529 account right now.
WHITFIELD: Wow, that's some great planning and foresight for certain. But now what if you've got your 529 and you've been planning for it and say your child is now 18 or 19 or 20 and decides I don't want to go to college, what happens to all that money that you've saved?
HURLEY: Well, you have a few options. The first option you have is to change the beneficiary on that account. If you have a younger child that is still in high school or in grade school and you might need the money for that child, you can simply switch beneficiaries and target that money for the next child. Another option that you have is to take the money out. You don't need it. You want to use it for other things; however...
WHITFIELD: But there are great penalties, right?
HURLEY: Well, there are penalties. If you take the money out and it's not used for college then you'll be paying income tax on the earnings.
WHITFIELD: Wow.
HURLEY: Or you'll be paying a ten percent penalty on those earnings.
WHITFIELD: Boy, better find a niece or a nephew or somebody who could benefit.
HURLEY: Well, you should. Your last option is to do nothing. You can just keep that account growing and maybe you'll have grandchildren in the future and that's when you actually use the money for college.
WHITFIELD: All right, good advice. All right, Joe Hurley don't go away because we're going to continue this conversation but, for now, we're going to take a short break.
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WHITFIELD: Well, welcome back to DOLLAR SIGNS. We're answering your questions about saving money for your kids' college. Sharing his wisdom with us is Joe Hurley from savingforcollege.com. Thanks for sticking around.
We also have an e-mail in. I'm sorry, we've got someone on the telephone from Virginia, Hertha who's got a question or comment - Hertha.
HERTHA: Hello.
WHITFIELD: Yes, what's your question or comment?
HERTHA: My question is about the financial aid packages that a lot of these colleges offer and when they do I know they take into account the money that the parents have, the money that the child has, and they seem to want to use more - they count more of the child's money than the parent's money. My question is about the 529 as to whether that's - when a college does that in figuring the financial aid do they consider the 529 money as the parents' money or the child's money?
HURLEY: Well, I have some good news for you. For federal financial aid purposes it's considered the parents' money, so it's assessed at a lower rate than if it were the child's money.
That's good news but you also have to know that colleges when they're doling out their own dollars can use whatever formula they want and in some colleges now they will consider all the money the same, whether it's the parents' money or the child's money. But right now, I would say 529 plans are treated favorably for federal financial aid purposes.
WHITFIELD: All right, thanks Hertha.
Now, Joe, is there anyone for whom a 529 is not good?
HURLEY: Yes, there are a category of people that it's not the best for. Certainly if you're investment style is day trading, if you're an active trader and you really don't want the restrictions of a 529 because in a 529 you're limited to a menu of options that the program provides and then you can change your selection but only once ever year.
That type of person might not be all that thrilled with a 529 and you also have to realize there are a lot of other options out there, the Coverdale Education Savings Account is a good option for some families in saving for college, even using taxable accounts, putting money in your child's name in a uniform gift to minors act account. That can work at least for a limited amount of money.
WHITFIELD: All right, now Eric has an e-mail question. Let's take a look at that.
He says: "My son is 16 months old now. When he was born, I started a 529 college savings plan for him. I put away $100 a month. Is this going to be enough and what are the pros and cons" that from Eric in New York, Joe?
HURLEY: Well, $100 per month is probably not enough right now to meet your college savings goal, at least not 100 percent of your college savings goal but it's certainly a good start and what you'll find is that many young parents as time goes on their incomes are going to go up too and they'll be able to afford higher college savings in the future. So, I think you're off to a good start just keep it going and when you're able to put more money into dedicated college savings accounts begin to do that.
WHITFIELD: All right, Joe, and John in Florida is on the line with us - John.
JOHN: I have a question. I live in Florida and I have four grandchildren. If I invest in the fund am I at risk for the fund losing money besides my investment in a particular area of mutual funds?
HURLEY: Well, certainly if you use the 529 savings plan in Florida your account is going to go up or down depending on the performance of the underlying investments.
You have to realize that risk just like any other investor. Florida also has a very popular prepaid tuition plan and in that event your prepaid tuition dollars are going to go up in value the same as tuition inflation goes up in Florida and you won't lose money in that particular program.
So, you really have to look at both those options and decide whether the prepaid program is better for you, the savings program, or you can even do a combination of both.
WHITFIELD: All right, Ernesto in New York also has a question for you via e-mail. "Which investment brings more returns for my child, mutual funds or savings plans?" You may have already in part answered that.
HURLEY: Well, I have because savings plans in effect are mutual funds. They invest in mutual funds and so when you choose a savings plan in large part you're selecting the mutual funds that are within that plan. There are some additional expenses that the 529 plan charges so it's not the exact same return as the mutual fund but it's in essence working the same way.
WHITFIELD: All right and this from Barb. "I'm a big believer in saving early for my kids' college education but why doesn't anyone ever mention saving early for daycare expenses? My daycare costs are higher than tuition costs at the University of Washington."
HURLEY: Well, that's a good question. Actually, when you're saving for any purpose you really have to look at your entire financial picture. You know a lot of times when we're talking about saving for college, we're also looking at retirement too.
You have to save for your own retirement at the same time you're saving for college, so it really becomes a more complicated process and you really do have to consider the entire budget, the entire home budget when you're figuring out exactly what you want to do.
WHITFIELD: Boy, that sort of goes along the lines of the whole private school, you know you're paying for private school for your kids and then you still have to continue to save for college.
Now, Linda in New York is on the telephone with us and, Linda, what's your question?
LINDA: Well, I unfortunately have waited a little too long. Now, I have a child who's a sophomore in high school and I want to know what, if anything, is the best I can do for the next few years?
HURLEY: Well, over the next few years if your child is older you probably don't want to take a lot of risk with your investments because anyone who has done that within the last three or four years knows that those stock investments have gone down.
So, I would encourage you to definitely look into the 529 plans and look into Coverdale Education Savings Accounts. Now, if you're in New York, realize that New York is one of the those states that offers you a tax deduction for contributions into its 529 plan.
So, you can take off as much as $10,000 from your New York income taxes by investing in that program. That's the amount of income. The actual tax savings is more like $500, $600.
And so, even if your child is in college you can still get that tax deduction even if you're only putting the money into the program and then taking it out very shortly to pay those college expenses and a lot of people don't realize that state tax savings is sitting there waiting for you, but I would encourage you to look in that direction.
WHITFIELD: And, Joe, isn't it true, though, that some of those state tax incentives just might not measure up for everyone however. There may be some kind of hidden fees or perhaps, you know, there aren't any earnings - the earnings just aren't great enough in the long run.
HURLEY: Well, true. The actual investment performance of your 529 plan is likely to outweigh the value of state tax deductions but the state tax deduction is certain. You're actually going to get that amount of benefit. But take a look, you know.
If the dollars are not significant you will want to shop for 529 plans around the country. Don't necessarily stay with your state's program if you think there's another 529 plan from another state that's better for you realizing that it doesn't make any difference where you send your child to college. You're going to get the same benefit from a federal tax standpoint no matter which state or which college your child goes to.
WHITFIELD: All right, Jennifer in Kentucky has this question. "As a college student I'm always on a tight budget. What are your recommendations for a college student wanting to get started in investing?" I guess investing for her further education, I'm hoping.
HURLEY: Well, I would say to start checking around. There are a lot of resources to help families, including students, get a start on investing on the Internet. There are a lot of resources in your local library. There are a lot of books and so I can't sit here and tell you exactly which resource to use but I would certainly encourage anyone who wants to get started on investing to do some of that research and check out what your options are.
WHITFIELD: All right, Michael is on the phone with his question - Michael.
MICHAEL: My question is about the tax free status after the year 2010. I have a two-month-old at home. I'm considering whether to invest in a 529 plan but I've heard that seven years from now there may be some changes in the federal laws. Do you have any comment or information about that? HURLEY: Well, you're certainly not the only one wondering about that because, as you know and others might not know, withdrawals from a 529 plan through the year 2010 are tax free but then that tax exclusion expires and withdrawals after 2010 become taxable to the student.
I certainly believe that Congress will extend the tax exclusion for 529 plans and most people also believe that but I can't guarantee it. The only other thing I can say is even if it reverts to prior law where the earnings come out taxable they will come out taxable to your child at a low tax bracket and your child will probably have tax credits to offset any liability.
So, in effect, for most families it's going to be tax free anyway but we just have to wait and see what happens with the law and whether it actually is extended beyond 2010.
WHITFIELD: Now, Barb has this question. "Is there any hope when we haven't saved and qualify for little based on income? We have a daughter who is a high school senior and a son starting high school." What hope does she have or what advice?
HURLEY: Well, the advice is to really look at your alternatives in coming up with other dollars for college. Scholarships, you should go on a scholarship hunt and see what types of scholarships might be available for your child. Even the local organizations may be offering scholarships that you can find. Many, many dollars are given out in scholarships every year and that's a great way to get money because you don't have to pay it back.
Your other alternative is to take out student loans to pay for college expenses. Naturally you have to pay back those student loans so that's not quite as good but certainly they're available for most families and if that's what you need to do to get your child into a good college, that's I think what your other major option is.
WHITFIELD: And, Joe, other than the scholarships, are there other things that kids can do to help themselves save some money quickly?
HURLEY: Well, one thing they can do is get a job. Certainly, a lot of students are working during their high school years, working through their college years to help pay for their own expenses.
WHITFIELD: All right.
HURLEY: And certainly you don't want a child working full time because that takes away from their studies but those dollars are certainly going to help pay the bills.
WHITFIELD: All right, Joe Hurley of savingforcollege.com and more notably the author of "The Best way to Save for College" for more tips on the complete guide to 529 plans. Thanks so much for joining us and being with us for the last 30 minutes answering all those questions.
HURLEY: It's been a pleasure.
WHITFIELD: Well, CNN has got the muscle this evening.
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