Saving for College

[JJHog]

Any suggestion besides contributing monthly to a mutual fund for the next 18 years? thank you.  ( I am out of state)

[WILL CLINTON]

win the powerball lotto.

[LA HAWG]

Quit your job and start working at McDonalds and make that your primary source of income, then you MAY be able to qualify for Grants.

[SultanofSwine]

You might also consider making additional principal payments on your home mortgage and then when you need the money use a home equity line of credit and take note interest as a deduction on your tax return. If you don't need the funds for college expenses you have just increased your equity or paid off your home earlier nd can then use the descretionary funds for retirement plans. Also you are not left facing a tax bill for getting money out of a qualified plan through a non-qualified distribution.

[WILL CLINTON]

Or you could just work at a company that is closing and fixing to lay off their workers.  That way you qualify for free education, mileage reimbursment, daycare, and books all the while getting 4 years of unemployment as long as you are a full time student.  BTW, I start college in the fall. 

[Hog6]

I believe you're referring to a 529 plan and I would definitely check into that depending on how those plans are arranged in your state.  I believe most are similar in their treatment.  I don't know a lot about them but I do believe you can lock in the current tuition rates which is a wonderful idea given the tuition increases.  My tuition has almost doubled in 4 years.  I believe the fund is invested into mutual funds and the gains are excluded from taxation.  Someone can correct me if I'm wrong, but based on my very limited knowledge this is what I understand to be the case. 

I currently have a senior at a public university and a sophomore at a private college, both in Virginia.  One basic truth- you never can save enough.  My wife and I did the Virginia pre-paid tuition deal (a 529 program) where you contribute pre-tax dollars and the tuition is locked in.  There is also another state program we contributed to for other expenses.  Each state has different programs so you have to check with your state department of education... you should be able to find out everything online.  Save, save, save. Oh, one other thing.  Have them apply for every scholarship available... its amazing what is out there... and the better they do academically in high school the more schollys they can get.

[HogHeathen]

529 plan...

[wishyjoshy]

Hog 6 and HogHeathen are right.  The 529 Plan is the way to go.  Each state must select a Mutual Fund Company to sponsor the 529 Plan.  Arkansas's is Franklin Templeton.  It is ok, but I like the Virginia Plan the best.  It is sponsored by American Funds which is probably one of the most consistent Mutual Fund companies out there. 

Big question is this:  How much time do you have?

[BigSnout]

Make sure you are fully funding your retirement first.  You can always borrow for college if you have to, but you can't borrow for retirement.

[JJHog]

I have 18 years to invest....

1--Retirement--between both of our 401ks, my profit sharing, her pension plan and social security, I think we both have enought to retire on at 65.
Home will be paid for in 12 years at age 56.

2--College---One reason I was kinda hesitant on the 529 is what if daughter does not go to college or if we need to pull some of her college funds for our retirement.

We live in Texas and I hope I convince her of going to UA (maybe)

That's why I was kinda thinking of the mutual fund deal, put in $300 per month for 18 years, pull out some for a car, use the rest towards college.

[hogsanity]

529 plan and make sure they study, learn and try to get a scholarship.  THere are tons of them available and there always will be. 

[snort]

I have heard that whatever you do , try to keep from putting the money in the child's name.  This could have an adverse affect on him/her if he/she decides to apply for financial aid.  The schools will look into his/her finances and see those assets.  Your assets can actually affect it as well.  I've herad that you should try to create an account in a grandparent's name and make the child the beneficiary.  Then if the child qualifies for financial aid or a scholarship the money can stay there and continue to grow until it is needed.  But I would run this by some sort of financial advisor first, as I am not one.

[McKdaddy]

I have 18 years to invest....

1--Retirement--between both of our 401ks, my profit sharing, her pension plan and social security, I think we both have enought to retire on at 65.
Home will be paid for in 12 years at age 56.

2--College---One reason I was kinda hesitant on the 529 is what if daughter does not go to college or if we need to pull some of her college funds for our retirement.

We live in Texas and I hope I convince her of going to UA (maybe)

That's why I was kinda thinking of the mutual fund deal, put in $300 per month for 18 years, pull out some for a car, use the rest towards college.

What I have my clients do when they are concerned that their child may not go to school is to fund both an UTMA and 529.  Perhaps you were going to save $200 per month for Susie Q.  You were concerned about the "what if" she doesn't go to college or vo-tech or any qualifying institution.  The tax benefits are too big not to do the 529, so do a combination of each, say $100 in each the UTMA and 529.

$ contribtuted to a 529 can be passed onto another child (or other relatives for that matter) if the one who's name the 529 is set-up in decides to skip any sort of higher education.

The risk of an UTMA is that once a child reaches "age of majority" then the money is theirs to do w/ as they please.  Of course, most parents tell me they are going to keep the UTMA quiet from their child as long as possible.

[hogfan160]

Whatever you do check the interest rates on loans. I used the money my family and I saved, but I could have gotten a loan at a lower rate than I was making on my money. I just did not check first. I have a friend who took out the loans at the lower interest rate, and he will be able to pay a considerable amount on a house with the college money and have a much lower interest rate.

[RAZ FAN]

 Also look into educational IRA's. You pay taxes on the money know but after that you don't have to pay any taxes on the money earned from it. I think you can put up to 2,000$ a year.

[iCalledThatHogBrotha!]

Tell your daughter to pay for her own school. and car. and gas. and clothes. and food. oh, and rent.

[LA HAWG]

I can't believe some of the threads that get moved out of here and some that are allowed to stay.  This comes from someone who has had some moved.

[Hog6]

Tell your daughter to pay for her own school. and car. and gas. and clothes. and food. oh, and rent.

I like this advice!  As to whether you lose the money or not if the kid decides not to go to college, I'm pretty sure I remember a way in my state's rules you can get it back.  Maybe some tax implications when you do that but the 529 is great... although I saw some other sage advice above.  It's almost too much to take in so we just said the hell with it and dove in heavily on the 529.  I cannot wait to get my boys graduated, especially the one in private school.  I'm going to go on the nicest vacation ever. Don't get me wrong.... love the kids but man, its like owning a big boat or something.

[fu-man-soo]

   
What We're Buying for College Funding
How Morningstar analysts invest for their own children.
by Todd Trubey | 02-09-06 | 06:00 AM | E-mail Article | Print Article | Permissions/Reprints

When you read a Morningstar mutual fund analyst weighing in on the best way to save for a child's education, it's a good bet that he or she is speaking from experience. That's because six in our cadre of more than 25 analysts have had children within the past six months, another analyst is expecting a child in June, and several more have children under the age of 3. So we thought it made sense, given that we recently wrote about how to pick a 529 plan and how to choose among various college-funding vehicles, to tell you what some of our analysts have done to invest for their own children.
Investing toward a child's education is every bit as complex and difficult as other types of investing, such as investing toward retirement. First, when a baby's born, the investment time horizon is long term but not as long as it is for a young worker who's just starting to invest toward retirement. Plus, the dollar goal is a moving target based on where college tuition and other education expenses will go; it's difficult to know just how much to invest. There's also an array of savings vehicles to choose from, including Coverdell accounts, 529 plans, UGMA accounts, and so forth. And yet, unlike with 401(k) plans, for instance, you pretty much have to make all the investment decisions yourself.

So maybe it's of some comfort that even people who think about such matters all day find investing toward an education to be difficult. Moreover, within our group there have been quite different solutions to the puzzle. I've polled the new parents around the department, and here are some of the things we came up with.

A Focused Fund in a Coverdell
The decision about which college-fund vehicle to use for our daughter, Megan Joy Trubey, wasn't particularly tough for my wife, Liz, and me: We quickly picked the Coverdell account over its closest competitor, the 529 plan. Illinois' 529 plan is poor, the state makes it tricky to invest in other states' plans, and we didn't have a massive amount of money to invest immediately (which is when a 529 comes in very handy).

Many college-savings plans feature broad diversification and marketlike exposure, and while we considered that option for Megan, we ultimately chose to invest in a high conviction fund. Either philosophy can work well, of course, but we simply decided to take a shot at beating the market with a fund that places a very great emphasis on preserving value. That latter factor held a lot of weight for us philosophically. Coverdells can hold only $2,000 per year, so we really didn't want the account to lose value. I should note that Megan's investments could become more marketlike over time.

The fund we chose for Megan is  Ariel Appreciation CAAPX. It is and has been an  Analyst Pick for some time. (Fund Analyst Picks are free to Premium Members of Morningstar.com; for a free trial membership, click here.) Plus, an admitted perk of my job is that I get to talk with the managers of the funds I cover, including John Rogers at Ariel. He and his team have struck me as incredibly disciplined, very smart, and thoroughly committed to their craft. The fund's strategy hasn't done particularly well on a relative basis the last several years, but the fund's worst year was a 10% loss in 2002--when many funds lost 20% or more. Ultimately, it's a fund that we think will do well for Megan without taking on inordinate risk. We have already made full contributions for both 2005 and 2006, helped toward that goal by gifts from generous relatives.

Broader Funds in Coverdells
Like the Trubeys, analyst Kerry O'Boyle and his wife, Shannon, decided that the Coverdell option was superior to 529 plans for the first dollars invested for their two boys, Mason and Clark. It's worth mentioning that Kerry, who heads up our analysis of 529 plans, has not written off those state-sponsored options; in fact, he outlined the best and worst 529 plans in the new issue of Morningstar FundInvestor. But Coverdells offer greater flexibility than do 529s in terms of spending options--you can use them for high school expenses, for instance--and investment options. And to date, investing in a 529 plan when you live in Illinois poses problems. First, the investment options within the Illinois plan are lackluster. Second, if you invest in an out-of-state plan, withdrawals are subject to Illinois state taxes.

Whereas the Trubey household went with what you might call a rifle approach (one concentrated fund), the O'Boyles have taken a shotgun approach. Mason's college-savings money is in  T. Rowe Price Retirement 2020 TRRBX and Clark's will go into  T. Rowe Price Retirement 2025 TRRHX soon. The O'Boyles prize the simplicity of a one-stop, age-based plan that provides automatic rebalancing and adjusts its asset allocation as the time horizon gets shorter. Kerry picked the T. Rowe Price funds because the components of the fund-of-funds are high-quality, actively managed vehicles. He also likes that T. Rowe's target funds are more stock-heavy than are competing funds from Fidelity and Vanguard. These target-maturity vehicles are surely an elegant solution: The O'Boyles will likely never need to pick another fund; they just need to keep sending checks.

The O'Boyles currently fund the accounts with lump sums. They might look into the possibility of dollar-cost averaging, to make the process fully automated and even more hassle-free, but haven't done so to date.

Analyst Andy Gogerty and his wife, Colleen, have also opted for a T. Rowe Price fund in a Coverdell account for their daughter, Kailan, and they have chosen an auto-invest strategy. Each month a specific amount will come out of their checking account and go into the Coverdell. There are some key advantages to doing so. On the practical side, it's passive: The money gets invested automatically unless you stop it. So, you can't forget to send a check, and when the market's behaving poorly, it remains disciplined. Plus, over time, you will buy more shares when the market has gone down and fewer shares when the market has gone up; you can think of that as a sort of automatic opportunistic plan. Andy notes that a key reason they liked T. Rowe Price is that there was no minimum to open the account, and it has a low minimum for monthly contributions (it's $50 per month).

The Gogertys selected the  T. Rowe Price Personal Strategy Growth TRSGX for Kailan. Like the firm's target-maturity funds, it's managed by a collection of T. Rowe Price managers, but here it's an investment committee managing in concert, not a fund-of-funds. And its asset allocation doesn't change over time; it will consistently remain a largely stock-based fund. The Gogertys did like the fairly small bond slice, however, because it tamps down volatility and increases diversification marginally.

The Gogertys will probably consider a 529 plan in the future. It's especially important to realize that parents can invest in both a 529 plan and a Coverdell account. Indeed, all of the families profiled here would consider a 529 plan in the future, especially given that it can be a great deal for grandparents looking to gift assets.

Going the 529 Route
Unlike the other analysts I polled, analyst Laura Pavlenko Lutton and her husband, Josh, did choose 529 plans for their two boys. They saw it as the best long-term plan for them, and a key reason is that they can make monthly contributions and also add windfalls and gifts from family without worrying about going over the $2,000 contribution limit of Coverdell accounts.

The Luttons lived in Massachusetts in 2002, the year Ted was born. Remarkably, given the prominence of money management in that state, there was no tax incentive to choose the Massachusetts 529 plan. So they chose the New York plan, which now offers a number of Vanguard offerings. By the time Cal arrived in 2004, the Luttons had moved to Illinois, but they enrolled Cal in the Utah plan because that state's program had very low costs for its own Vanguard offerings. Laura reports that at some point they'll probably transfer Ted's assets to the Utah plan as well.

As far as investment elections go, it's pretty straightforward for Cal and Ted. The Utah plan is age-based, so Cal is in the 0-3 bracket, with 95% in an S&P 500-like index fund and 5% in a total bond index. The New York plan is also age-based, but with conservative, moderate, and aggressive asset allocations with each age group. Within the 0-5 year bracket, the Luttons have chosen the Moderate allocation, which is 65% equities and 35% bonds. A big part of that equity stake is in  Vanguard Total Stock Market Index VTSMX.

Laura notes that it will be interesting to see how these plans do over time. Cal's allocation is more aggressive, but he's missing the smaller-cap exposure. Meanwhile, Ted has a stout bond exposure that could hold his portfolio back a bit--and it could also provide stability in an equity bear market.

Got questions about personal finance issues? Be sure to check out our newest column, The Short Answer, every Tuesday on Morningstar.com.

[MJ2]

Teach his to throw and catch a FB.   Do it everyday for 1 hour per day for 18 years =

Free college
Lots of women
Pro signing bonus
Retirement security for you
Lots of women for you

Cheap investment, great return.

[gumby013]

The best way would be a 529 plan.  Or else you can do what I did and get my ride paid by a paint company.  I guess they wanted me to work for them after I graduated.  Too bad for them.

[bigpiggo]

Educational IRA's or ESA (Educational Savings Account) should be looked into.  529 Plans aren't for everbody.  The amount was still $2000 for 2005 which can still be contributed to until April 15th, I believe.

[RazorHawg16]

Quit your job and start working at McDonalds and make that your primary source of income, then you MAY be able to qualify for Grants.

no he won't he would be making too much money...im 18 and filed independently and i made a whoppin 11k last year and didn't get ANY grants!!! I gotta pay for 6 years of education at  University of Arkansas (AT FORT SMITH) because at Fayettville   its like 20k a semester or some bull darn. Thank god im going for Business Administration and a minor in Spanish. So I will be able to pay all my loans back pretty quick with a god job.

[Stamford Hog]

Here is a good website with information about 529 plans for every state.

http://www.savingforcollege.com/

[DukeOfPork]

....So I will be able to pay all my loans back pretty quick with a god job.

Well, if you're reasonably sure that you're going to land a "god" job, I seriously doubt that you will have any financial worries.  Sounds like you're set.

[chiefsfan]

Sell the kid down the river and invest the rest in retirement.