College Savings Category
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.
Dear Liz: I’m facing the end of child support and need to finance my son’s college education, plus I have some home maintenance costs looming. Should I get a home equity loan or line of credit (assuming I can qualify) to pay off these pressures, or should I raid my retirement fund? I am 60, make about $80,000 a year and have no debt besides the mortgage and a car loan, but I have only about $100,000 in retirement accounts. (I had to wipe out my savings once before in a two-year spell of unemployment.)
Answer: There’s no polite way to put this: You’re too old and too inadequately prepared for retirement to be paying for your child’s college education.
It isn’t a good idea to raid retirement funds prematurely in any case, but certainly not when you have so little saved. Borrowing to pay for school would make sense only if you were adequately prepared for retirement and had plenty of time before then to pay off the loan.
Even if you plan to work into your 70s, life may interfere. Nearly 40% of retirees interviewed by the Employee Benefit Research Institute say they had to quit work before they wanted to, typically because of layoffs, poor health or the need to take care of a family member.
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You must focus on building up your retirement fund as much as possible while you still can. That means your child will need to figure out how to pay for college on his own. Many students save money by attending a community college for two years while living at home, then switch to a four-year public institution to finish their degrees. Your son may qualify for scholarships or grants; if not, federal student loans can help him pay the bills without sinking too far into debt.
You really shouldn’t be borrowing for home maintenance costs either. Ideally, you would have set aside money from your current income that’s earmarked for these costs. If the repairs are pressing, however, you can pay for them with a low-cost home equity line of credit and then repay the loan as quickly as possible.
Dear Liz: As a student I was not aware of finances as much as I should have been and borrowed too much. I have about $60,000 in student loan debt plus an $11,000 car loan. I am contemplating going back to school because the job I really want — to be a counselor — requires that I have a master’s degree. My friends say I’d be crazy to go into that field because the pay isn’t that high and I would most likely incur more debt. I am hoping to get scholarships and grants or pay out of pocket as I go. I currently pay all my bills and am really tight with spending. I want to take this leap without destroying my financial future. Any advice?
Answer: In general, you shouldn’t borrow more for an occupation than you expect to make the first year out of school. If you check the U.S. Department of Labor Statistics, which tracks pay for various occupations, you’ll see that the median wage for counselors depends on their specialty (vocational counselors get paid more than rehab counselors, for example), but the median wage tends to be in the $30,000-to-$50,000 range. Expect your starting salary to be somewhat lower.
That doesn’t mean you can’t go back to school, but you probably shouldn’t take on more debt to do so. You can apply for financial aid but expect stiff competition for grants and scholarships — most aid comes in the form of loans. Your best bet may be to attend a public college, perhaps at night so you can keep your day job. For more on attending college without loans, read Zac Bissonnette’s “Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships or Mooching Off My Parents.”
Dear Liz: I’m an estate-planning attorney and want to expand on the answer you gave to the parent who wanted to give her children money for their educations or a car but was worried about gift taxes.
Your explanation of the federal rule was accurate — only gifts of more than $13,000 per recipient have to be reported, and gift tax isn’t owed until amounts over that exclusion exceed $1 million — but state laws vary. (California levies no gift tax.) In addition, the $13,000-per-person annual exclusion and the $1-million lifetime exclusion is available for each giver, so a married couple could give $26,000 without reducing their lifetime exemptions.
Also, tuition is not considered a gift if paid directly to the school, irrespective of the amount, so the giver could offer to pay tuition directly and then give money separately for a car. Finally, 529 college savings plans are an excellent way to save for a child’s higher education and are often preferable to giving money directly to the children.
Answer: Thanks for the additional information. College savings plans allow people to contribute up to five times the annual gift exclusion amount at one time, meaning generous parents or grandparents could stow $65,000 into a 529 plan in one lump sum (as long as they make no other gifts to the recipient in that five-year period).
Dear Liz: My daughter is a sophomore at a very expensive college, and federal loans cover only $6,500 of her costs. She has taken out two private student loans with me as a cosigner, one at 6.5% interest and the second at 9.9%. I need $15,000 more for this semester’s tuition. I am an unemployed single mother but cannot get much financial aid. She is an above-average student but cannot find any awards or scholarships.
Answer: Your daughter may need to look for a less expensive education, since it appears neither of you can really afford the one she’s getting.
Unlike federal student loans, private student loans tend to be expensive, with variable rates and less flexible repayment options. Borrowers can easily find themselves taking on far more debt than they will be able to repay after graduation, yet this debt typically can’t be discharged in bankruptcy — it can follow your daughter for life.
A better option, if you must borrow, is for you to take out PLUS loans. These are federal loans for parents and graduate students that allow you to borrow the difference between your daughter’s college costs and any financial aid, including federal student loans, she gets. The rates are fixed at 8.5% or less.
PLUS loans do require a credit check. If you don’t pass — you’re 90 days or more overdue on a bill or you’ve had a bankruptcy in the last five years, for example — your daughter’s eligibility for student loans would be increased somewhat to help compensate.
But both of you should be thinking about alternatives. You really shouldn’t borrow money if you don’t have a way to pay it back. When you’re unemployed, taking on $15,000 a semester in debt is pretty foolish.
If her school won’t reconsider her aid package in light of your unemployment, she should be researching less expensive schools to which she could transfer her credits.
Dear Liz: I have twin boys and have been looking for a college fund to set up for them. Most bank saving accounts don’t pay much interest. The only thing I have found that is halfway decent is a certificate of deposit. My grandmother set up a trust for me, but I don’t know whether that’s a good idea these days. Do you have any ideas that would help?
Answer: You’re actually asking two questions. The first is what vehicle to use for college savings, and the second is how to get a decent return on your money.
Let’s take the latter question first. Bank savings accounts or certificates of deposit are fine if your kids are headed off to college in a year or two, but these low-risk investments won’t give you much growth on your money. In fact, you’ll almost certainly lose buying power over time when you consider inflation. If your money is in a taxable account, you’ll lose that much more.
Many parents opt to take more risk in order to accumulate more funds. If college is 10 years or more in the future, investing at least some of the money in stocks or stock funds makes sense.
The vehicle you use is also important. If you expect to get financial aid, you’d be better off avoiding custodial accounts such as Uniform Transfers to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) accounts. These were popular accounts years ago when tax rates were higher, but they count heavily against you in financial aid formulas.
Many families find 529 college savings plans to be the best choice. These state-run accounts allow your contributions to grow tax-free for college and are treated favorably in financial aid calculations. These plans typically offer a choice of investment options, including age-weighted options that start out more heavily invested in stocks but that ratchet back exposure to risk as college draws closer. For more information, visit SavingForCollege.com.
Dear Liz: Are banks still lowering the amount of available credit? I’m concerned because we were hoping to use our home equity line of credit to pay for our children’s college educations, if need be.
Our current balance is less than 5% of the total available limit, but my credit reports show our credit line lender recently reviewed our credit history. I am concerned that our bank will lower our available credit as my son is about to start college. Are my concerns valid?
Answer: Perhaps. Lenders have been reducing home equity lines of credit as home values drop. If your mortgage balance and your line of credit total more than 60% of the current value of your home, you may be at risk of having your limit reduced right when you planned to use it.
If that’s the case and your son is heading off to school in the next year, it might be prudent to withdraw the money now and keep it in a savings account.
If college won’t start for several years, though, you might want to explore other options, since it’s generally not a good idea to borrow money so far in advance of when you’ll need it.
Fortunately, you have plenty of options when it comes to paying for college. Just make sure you fill out a Free Application for Federal Student Aid. Even if you don’t qualify for need-based aid, filling out the FAFSA will allow you to apply for federal student loans. Your son can get Stafford loans at a 6.8% fixed rate and you could get PLUS loans with a fixed rate ranging from 7.9% to 8.5%. Although the amount of student loans your son can get is generally limited to $31,000 for an undergraduate degree, PLUS loans allow you to borrow whatever you need to cover any costs not paid for by the student’s financial aid package.