College Savings Category
Dear Liz: I opened Uniform Transfers to Minors Act savings accounts for my two boys (now 7 and 10) when they were newborns. I chose not to go with the 529 college savings accounts because I didn’t like the restriction that the money had to be used for education. It has always been my intention to use these funds for college, but if they choose not to go to college, then it could be used to help them purchase their first homes, for example.
I’ve been squirreling away a couple hundred dollars each month in each account, but I read a few of your previous pieces and think maybe the UTMA accounts were not the best vehicle for this. Could they one day just demand the money and do with it whatever they want?
Answer: The short answer is yes. In most states, the money will become theirs at age 21 to spend however they want, although a few states let them have it at 18.
The other big disadvantage to custodial accounts such as UTMA and UGMA (Uniform Gifts to Minors Act) accounts is that they’re counted as the child’s asset in financial aid calculations. That can substantially reduce the amount of aid they get.
But even more important than the financial details is your attitude. You need to give up this notion that not going to college is a reasonable option for your kids. In the 21st century, some kind of post-secondary education is all but a necessity for a person to remain in the middle class, labor economists tell us. Your sons don’t have to study at a four-year school, but they are likely to need at least some vocational training beyond high school.
If you want to reduce the effect of these accounts on any future financial aid packages, you have a couple of options. One is to spend the money before they get to college, although that’s probably not the route you’ll want to take, given how much money you’ve already saved. If the accounts were smaller, you might just use them to buy a computer, pay for summer camp or cover the cost of tutoring. Such expenditures are allowed as long as the money is spent for the benefit of the child and doesn’t pay for expenses that are your obligation as a parent (food, shelter, clothing, medical care).
Another option is to liquidate the accounts and invest the cash in 529 plans. This would dramatically reduce the money’s effect on financial aid calculations, since it would be considered your asset rather than your child’s. The money could be withdrawn tax free to pay for qualified higher education expenses. If it’s not used for higher education, the contribution portion of the withdrawal won’t be taxed as income, but any earnings will be, plus there will be a 10% federal tax penalty on those earnings.
If you decide to transfer the money, the 529 account should be titled the same way as your UTMA accounts, said Mark Kantrowitz, publisher of the college planning website FinAid. Ownership of the account shifts to the child when he reaches the age the UTMA account would have terminated. That gives him control of the money if it’s not spent on education, but he would have had that anyway. You can read more about the details at http://www.finaid.org/savings/ugma.phtml.
Dear Liz: When my cousin and I were children more than twenty years ago, my grandparents opened a college savings account for each of us. I have no idea what kind of account this was, or where it was located. My grandfather passed away a few years later. While I was in high school, my grandmother informed me the investments had not done well, and she was closing the accounts. I received a check for $500 at high school graduation that was supposed to be the balance of the account. I assumed my cousin received the same, until she recently posted on a social networking site she was thankful her grandmother started a college fund when she was young that covered the entire cost of her education. I am furious at my grandmother, and now believe both accounts were cashed out and given to my cousin. Without knowing anything about the accounts, except that one was intended for me, is there anyway to find out what actually happened to the money? And would I have legal recourse to try to recoup the money, since my grandfather intended it for me?
Answer: Your cousin has at least two grandmothers. Have you considered the possibility she wasn’t referring to the one you share?
If your cousin left no doubt in her post, there’s still not much you can do. If your grandparents opened custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, then legally the money was yours and shouldn’t have been transferred to your cousin, if that’s in fact what happened. But your grandparents simply may have opened accounts in their own names that they informally earmarked for college educations. In that case, they could have done anything they wanted with the money.
Even if you had records proving the money was yours and it was wrongfully transferred, the idea of taking legal action against a family member should give you some pause. Since you have no such records, you’re pretty much at a dead end. You can ask your grandmother about this, or simply let the matter rest as one of the mysteries of family life and move on with your own.
Dear Liz: What recourse would my 21-year-old nephew have if his mother embezzled his college fund? The fund was set up by his parents when he was a child.
Answer: If your nephew wants to try to sue his mother, or file a criminal complaint against her, he should talk to an attorney about his options. Money that’s placed in a trust or custodial account for a child’s benefit is no longer the parent’s to take, although too many parents don’t understand this and grab at an easy source of funds when money gets tight.
In the more likely case that he doesn’t want to take formal action against his mother, he could simply ask her to return the money she took. His chances of success may not be great — people who steal from their kids may not be eager to make amends — but he likely stands no chance if he doesn’t ask.
Dear Liz: I have an 18-year-old daughter who wants to attend a private, out-of-state school. I don’t have any money saved for her education and do not make enough to cover the cost of this college. What are my options? She’s an A student and is planning to go to medical school.
Answer: You need to have the conversation you probably should have initiated a few years ago, before she started the college application process. She must understand that what she wants and what you can afford to provide for her may be two very different things.
Start by applying for financial aid at the colleges that have accepted her (let’s hope she applied to more than one). The “estimated family contribution” calculator at FinAid.org can give you a rough idea of what you’ll be expected to pay, but the actual package you’re offered can vary somewhat depending on how much the school wants your daughter to attend. You may want to invest in some books to help you understand the process, such as the Princeton Review’s “Paying for College Without Going Broke, 2012 Edition” and education expert Lynn O’Shaughnessy’s workbook, “Shrinking the Cost of College,” available at thecollegesolution.com.
Once you have the financial aid offers you can see which schools may be within your grasp and which are too expensive. Some schools encourage students and their parents to borrow heavily to attend, but that can lead to financial disaster — particularly since she has so many years of schooling ahead. Your daughter should try to limit her borrowing for her undergraduate education to what’s available through the federal student loan program (typically $33,000, total) and avoid private student loans, which have fewer consumer protections.
You as a parent can borrow through the federal PLUS program, but it’s easy to go overboard. The PLUS program will lend you up to the full cost of your daughter’s education, but the loan payments could be overwhelming and could prevent you from retiring. Student loan debt is almost impossible to discharge in bankruptcy, so you should be cautious about taking it on.
Your daughter should be able to cobble together an affordable education if she’s flexible about where she gets her undergraduate degree. Beyond that, she should know that the military and the National Health Service Corps pay for medical school in exchange for several years of service.
Dear Liz: I have some very important questions regarding my son who is going to be attending a private university next year. He is going to be a student athlete (he golfs), which does not help very much financially. We’re shocked at the cost and do not have enough saved. We were counting on selling our home and downsizing to pay for his education, but got caught up in the real estate downturn. We need some help and advice on how we can get access to the free money that I know is out there. We also have two other boys, 13 and 6. We will start immediately saving for their college.
Answer: The “free money” you know is out there may not be the answer to your problems.
Yes, there are scholarships your boy might get to help pay for his education. But if he receives any financial aid from the university, those scholarships may reduce the amount he gets in grants — another form of financial aid that doesn’t have to be paid back.
If, on the other hand, he doesn’t get any grants, the scholarships could reduce the amount of loans he’d otherwise need to take out. He can start his search for scholarships at FastWeb.com.
You definitely should apply for financial aid from the university, if you haven’t already. (FinAid.org’s estimated family contribution calculator can give you a rough idea of how much you’ll be expected to chip in, although the school’s actual package may differ somewhat.)
Then take a hard look at what this education is going to cost you. You may not be able to afford it. If you would have to stint on your retirement, or your son would have to borrow more than the federal student loan limits ($5,500 for his freshman year), you probably need to look for other alternatives.
One option is for your son to live at home and attend a two-year college to get some of his requirements out of the way. Another is an in-state school, or one with a golf team that wants him badly enough to offer a better merit-based package of aid. FinAid.org offers resources and ideas for getting an affordable education, as does college expert Lynn O’Shaughnessy’s workbook, “Shrinking the Cost of College,” available on her website, TheCollegeSolution.com.
What you don’t want to do is bankrupt yourself, or consign yourself or your son to huge student loan debts. No education is worth a lifetime of debt, particularly when other options are available (and you have two other kids to educate).
Dear Liz: What are some good possible resources for loans and other financing to pay for school? I am going back to school to try for my degree and I am pretty strapped for cash even though I work full time. Any suggestions would be appreciated.
Answer: Don’t go back to school to “try” for a degree. Go to get one. A college education is economically useless if you don’t get that sheepskin.
The financial aid education site FinAid.org is a great resource. You’ll find an “estimated family contribution” calculator that will predict how much you’ll be expected to pay for your education and how much financial aid you can expect. You also can learn about federal student loans, which are available to just about everyone and which have reasonable, fixed rates and numerous consumer protections, including income-based repayment plans. Try to avoid private student loans, which have variable rates and few of those protections.
Dear Liz: I’m 64 and have a master’s degree in education but can’t find a job. Is it too late to go back to school? I was thinking of majoring in occupational therapy.
Answer: It’s never too late to go back to school — but it is possible to spend too much doing so.
The good news is that occupational therapy is a fast-growing field with many job opportunities. The bad news is that you typically need a master’s degree to be an occupational therapist, and master’s programs (as you know) aren’t cheap.
Plus, your age is a factor to consider. Getting hired after 50 is tough, regardless of your field.
So rather than invest a ton of money in a master’s program — or, worse yet, borrow to fund this education — consider becoming an occupational therapy assistant. This field is relatively high paying and usually requires an associate’s degree, which you can get at a low-cost community college.
Before you begin, though, you should research the job opportunities in your area to make sure demand is high enough that your age will be less of a factor.
Dear Liz: I am returning to college in my later years for a second degree. Can I save in a 529 plan for my own college use in two years?
Answer: You can, but why would you want to?
The big benefit to a 529 plan is that your returns can grow tax-free. That’s a boon for parents in higher tax brackets contributing for young children, since their money has years to grow and they can put at least some of their cash into riskier assets, such as stocks.
If you need the money within two years, though, it should be in a cash account that won’t earn much. (The average money market fund pays around 0.02% right now.) You wouldn’t be getting any real growth, so the tax benefit of a 529 plan is minuscule. What you would get are restrictions on how you use the money and possible complications for your tax returns. If you want to use education tax credits, for example, you won’t be able to apply those on expenses you’ve paid with a 529 withdrawal.
A simple FDIC-insured savings account — perhaps at an online bank that pays around 1% — is probably the better way to go.
Dear Liz: My son will be going to a for-profit technical school about 120 miles away from home. Unfortunately, we have not saved any money for his college education. What are our best options for borrowing to pay for his college education, which will cost about $92,000 for four years? He is not eligible for any financial aid other than federal student loans. Our daughter will graduate debt free with her bachelor’s degree in December. Since we concentrated on her education first, our son kind of got left behind.
Answer: Please rethink this plan, because your family probably cannot afford this education.
Federal student loans would allow your son to borrow, at most, about a third of this school’s cost. If he were to borrow the rest of the money, he would have to turn to private student loans, which have variable rates and none of the consumer protections embedded in federal student loans. Private student loans are like using credit cards to pay for college — except unlike credit card debt, student loan debt can’t be discharged in bankruptcy.
The other alternative would be for you to borrow the difference between his federal student loans and the cost of his education using PLUS loans. These are federal education loans for parents and graduate students. As with federal student loans, the rates for PLUS loans are fixed, although they’re somewhat higher — 7.9%, compared with 6.8% for unsubsidized Stafford student loans.
But using PLUS loans means taking on a lot of debt at a time in your life when you should be concentrating on saving for your own retirement. If making the payments would interfere with your ability to contribute sufficiently to your retirement funds, you shouldn’t even consider borrowing the money.
Even if you already have a well-funded retirement plan, you should think twice. Your son may be able to get a better, more affordable education from a public college — particularly if he starts at a two-year community college nearby, allowing him to live at home more cheaply, and then transfers to a four-year school.
For-profit colleges can be expensive, and loans made to students who attend four-year for-profit colleges have twice the default rates of loans made to other college students. Figures provided by the U.S. Department of Education show that of loans that entered repayment in 1995, 30% of those made to students attending four-year for-profit colleges were in default 15 years later, compared with 15.1% for four-year public colleges and 13.6% for four-year private nonprofit schools.
That high default rate should give you pause, even if you were paying cash for this education, because it indicates that many graduates either aren’t finishing their educations or aren’t finding jobs that pay well enough to repay their loans.
Critics complain that for-profit schools often over-promise and under-deliver when it comes to training students for existing jobs. The for-profit schools attribute high default rates to the demographics of their students, who are more likely to be lower income and from minority groups than other college attendees.
You may feel guilty for shorting your son when it came to saving for college. But please don’t compound the problem by blessing an education that could leave him, and you, with unaffordable debt.
Dear Liz: As a parent of a college freshman, I rushed out and closed out one of my son’s 529 college savings plans, thinking I would use the money to pay his expenses for the whole year. It turns out I will have pulled out $6,000 too much in 2010, because I was charged only for one term of room and board. Can I prepay the extra in 2010 for 2011 room and board and tuition as a valid college expense to avoid any 2010 taxes on the extra funds? If not, do you have any suggestions to avoid 2010 taxes?
Answer: Withdrawals from a 529 plan are trickier than many people think. They’re tax free only to the extent that you pay qualified higher education expenses in the same calendar year that you take the distribution — and that other tax breaks aren’t used.
Qualified expenses include tuition, fees, books, supplies, equipment and additional expenses for “special needs” beneficiaries. Qualified expenses do not include insurance, sports or other activity fees, transportation costs or the purchase of a computer, unless it’s required by the school.
If you pull out too much, you have to pay income tax and a 10% federal penalty on the earnings portion of the excess withdrawal. (For example, if your account totaled $10,000, and $6,000 was earnings while $4,000 represented your original contributions, you would pay the penalty on 60% of any excess withdrawals.)
There’s another way you might get hit. If you were planning to use an education tax credit, such as the Hope or Lifetime Learning credit, you would have to deduct from your qualified expenses the amount used to generate the credit. Let’s say you used $5,000 in tuition expenses to generate a $1,000 Lifetime Learning credit. That $5,000 would have to be deducted from your qualified expenses total, which would further reduce the amount of your 529 withdrawal that’s tax free. You wouldn’t have to pay the penalty on the excess withdrawal created by the tax credit adjustment, but you would have to pay income tax on any earnings.
Now the good news: You are allowed to prepay next year’s costs to help boost your qualified expenses total. If it’s been less than 60 days since the withdrawal, you also would be allowed to roll the excess distribution over into a new 529 account.
Fortunately, you discovered the problem before the end of the year. If you’d learned about the problem only when you started preparing your tax return next spring, as many people do, it would be too late and you would be stuck with the extra tax and penalty.