Plan for college at each stage of a child's life

Financial decisions to be made at intervals along the path toward higher education

By Liz Skinner

Aug 14, 2013 @ 3:47 pm (Updated 4:22 pm) EST

college savings

College planning is not just a “set it and forget it” event.

Especially as children age, parents and their advisers need to stay on top of how much has been saved per student and figure out exactly where each dollar will come from to cover tuition and the other bills that make earning a college degree such an investment.

Here's what clients should be doing at each stage of their child's life to remain on track for graduation. The upcoming days, as kids return to school, are a great time to direct parents' attention to college planning.

Starting as early as possible and continuing through middle school, families should be focused on saving and investing as much as possible, according to Marina Goodman, an adviser with Brinton Eaton LLC. Section 529 college savings plans are typically best for this, though keeping an eye on fees associated with the state-sponsored savings plans is important. It's hard to beat the tax-free growth the plans offer, she said.

“There's still long enough to invest in other-than-ultrasafe investments, and the 529 plan is a good vehicle to start with in younger grades,” Ms. Goodman said.

Financial adviser John McDonough said 529 plans are “not bad” for wealthier families, but he steers clients who think they may qualify for financial aid toward savings that won't count as assets in the aid formula. He recommends parents of this younger set consider saving in Roth individual retirement accounts if their income doesn't disqualify them, or in a cash value life insurance vehicle. Since their children are young, parents will have plenty of time to let the cash accumulate in such an insurance product, Mr. McDonough said.

Parents also should look at prepaid-tuition plans if they believe that their children will remain in-state for college, he said. One of his Texas client families is saving about $10,000 a year because they purchased the state's prepaid plan for their son and he's attending an in-state school.

As children enter high school, it's time to de-risk the portfolio as much as possible, advisers said.

Mr. McDonough advises moving funds into a cash position within 18 months or two years of needing that money to pay for tuition.

“This is when parents have to figure out exactly where the money will come from,” he said. “Most families find they don't have quite as much as they expected at this point.”

Families should consider cutting back on spending and looking for any extra dollars for college, including directing students to apply for scholarships and work study programs. Also, this is the time to think about whether the student should spend two years at a local school to save on tuition and living expenses before transferring to a school to complete his or her education and receive a degree, he said.

If parents believe they may qualify for financial aid, they should think about using up any funds saved in Unified Gift to Minors Act or Unified Transfers to Minor Act accounts by 10th grade so those sums are not factored into the financial aid formula as student assets, Ms. Goodman said.

During high school is also when families need to evaluate whether they will need loans to pay for college and what type will work best for them.

Troy Onink, chief executive of Stratagee.com, which provides college-planning approaches to families and their advisers, said he tries to help families avoid debt to pay for college and recommends that students don't take out more over the four years of school than the annual starting salary for their intended major.

If families have to borrow, the student's first option should be the federal Stafford Loan, which typically has lower rates than private loans and better repayment terms. Students don't start paying back these loans until after earning their degree, in contrast to the Parent Loan for Undergraduate Students, or PLUS, loans that parents take out for their dependent children and must immediately begin to repay, Mr. Onink said.

Some parents also take out home equity loans because they can get a tax deduction on that interest, but that move puts the home at risk, he said. He recommends that parents keep in mind any younger children that will be coming along to college in a few years when they consider loans to pay for a student's higher education.

Other parents use stock options or employee stock purchase plans that allow them to buy at a discount company stock that they immediately flip, Mr. Onink said. If the parent gets a 15% discount, then — even after paying taxes — there is typically a 9% rate of return, he said.

This is also the time when parents should make sure they aren't putting too much away in a 529 plan, because they will have to pay a 10% tax penalty to get their money back if the funds are not used for college expenses. Advisers recommend having some money saved for college outside 529 plans to cover extra college expenses not allowed by the plans.

Even after the student begins college, parents should continue to strategize as they pay for school.

For instance, if the 529 plan has enough to cover only two years, use money from other accounts to pay some of the early bills to keep that investment plan growing tax-free even longer, Ms. Goodman said.

Also, see if the school that the student has chosen and been accepted to offers prepaid tuition for a whole year or, if possible, the full four years, she said. Typically, those who pay upfront save on tuition increases for future years and can effectively get about a 6% discount. However, funds saved in a 529 plan have to be used to pay costs of a particular year, not a bill for all four years, Ms. Goodman said.