COLLEGE SAVING - DOWN TO THE WIRE

Neal A. Deutsch, CFP^®

Published in Rivertown Journal, June 2006

Tassels, caps, gowns and football season - sights that trigger high school students’ dreams of college - often signal a financial nightmare for parents facing college costs estimated to reach as high as $120,000 by many sources within the next few years for a 4 year education. Unfortunately, there is no miracle solution for financially strapped parents with only a few years to raise funds for their child’s college education, but there are several investment vehicles that can help to make this trying time a bit less stressful.

With children more than five years away from college, growth-oriented portfolios may offer an investment direction and return potential for parents to achieve the necessary education fund if the market is favorable. Parents should be careful to keep the assets in the parent’s name instead of the child, which may keep the child from spending the money on something other than a college education when the child becomes legally entitled to the funds.

A more conservative investment approach is recommended if a child will attend college in three to five years. It would be an unhappy last summer if college investments took an untimely dip. A balanced portfolio with a mix of equities and bonds is a conservative investment approach that attempts to minimize this risk through diversification.

For families with only a year or two to the first big day, short-term, fixed income investments may offer the necessary liquidity and safety of principal. If a family needs to protect its principal the best route to take may be short-term investments such as U.S. Government notes, money market mutual funds, and bank CDs that may provide some moderate income with little risk to principal.

For families in immediate financial need, a last minute option may include securing a home equity loan, where the interest paid on the loan may be tax deductible. Another option might entail loaning to oneself by borrowing from a 401(k) retirement plan. Of course, this would only be possible if the particular retirement plan allows for it. Note that you cannot borrow from your IRA.

Finally, weighing education savings options is beneficial to determine whether a parent with a college bound child intends to apply for financial aid, and if so, how assets owned by the child will be treated by colleges and universities during the financial aid needs review. Typically, 35% of assets held in the child's name may be deemed available to meet education expenses while 5% to 6% of the same assets may be deemed available if owned by the parent. The net effect may be potentially less financial aid for the child if assets are held in the child’s name. While UTMAs/UGMAs are considered assets of the child for financial aid purposes, 529 college savings plans and regular investment accounts are more advantageously counted as an asset of the parent if the parent is named as owner on the account. Be sure to thoroughly investigate any assistance options available to you via grants, scholarships, etc. Beware of school loans such as Sallie Mae: the payback over time can be multiples of the original loans.

The best time to save for college is when your child or grandchild is first born- monthly or annual savings is much easier over time than the immediate crush of gathering a large pool of assets. Of course, all of these recommendations must be considered in light of your particular financial circumstances. No solution is proper for every situation, so be sure to consult a qualified financial planner to help you choose the best options to suit your family needs.

Neal A. Deutsch is a Certified Financial Planner^™, Registered Securities Principal and President of Chestnut Investment Group in Suffern, NY, helping people with financial planning since 1984. Please feel free to call Neal at 845.369.0016 or email him with your questions at neald@chestnutinvestment.com Feel free to visit his website at www.chestnutinvestment.com