Looking in the eyes of your young academic prodigy, you see an Ivy League future. Take a peek at your portfolio and you see plummeting figures that spark fear in any parent who hopes to foot the bill. Add in anxiety fostered by rising tuition, and parents have a real cause for concern. But by educating yourself about the options, being realistic about your family’s needs and starting to save as soon as you’re able, you can keep dreaming without worrying about a financial nightmare.
“I know how it goes,’’ says Tana Barker, mom of two and a North Dallas financial adviser. “You’re a new parent, and you might not have extra money to start saving. But, you’ve got to think of it this way: You can begin with as little as $100 — we’re talking about how much it costs for a family of four to go out to eat.”
Barker, who meets with parents on a near-daily basis, commiserates with parents’ feelings of anxiety: “When my second child was born four years ago, I knew that I needed to hit the ground running and start planning for their college.” Many parents hit a roadblock simply getting started, she says. “It can be a confusing process [deciding among savings routes], and you can’t simply leave your child’s future in a financial adviser’s hands. It’s your job to be educated on the choices and to be proactive.”
An expert who specializes in college savings can help present all your options, says Casey Conway, financial adviser at Sloan Wealth Management in Dallas. “What’s important is that you evaluate where your family is at — meaning how old your kids are and how many years you have until you’ll need to pay for school. Across the board [no matter how you save for school], you will become more conservative and take less risk as your children get older.”
Ready to get started? According to the advisers listed above, as well as Ron Hughes, a financial adviser with Northwestern Mutual, and R.J. DeSilva, representative of the Texas Comptroller’s Office, a 529 Savings Plan and the Texas Tuition Promise Plan are two popular options for Texas parents. Both savings routes provide tax-free withdrawals on education-related expenses. So, check out the chart on the right to see how you can make the best of a recession and keep your sights set on paying for your child’s education.
WHO IS ELIGIBLE?
529 Savings Plan: Any U.S. resident age 18 or older — a parent, grandparent, aunt, uncle and even family friends — can open and contribute to a 529 plan that is set up with the child (of any age) as the beneficiary.
Texas Tuition Promise Fund: Any U.S. resident age 18 and older can open an account with the Promise Fund as long as the beneficiary of the account is a Texas resident. If the child is not a Texas resident, the purchaser must be.
HOW DOES IT WORK?
529 Savings Plan: Interested parties deposit monthly savings into the 529 plan — as little as $25 — and the money is invested in various ways, depending on parents’ desired risk. Earnings from the investment grow free of federal taxes. Parents can withdraw the funds to pay for higher-education costs (including tuition, books and room and board) at in- and out-of-state schools without being taxed. It’s the best option for parents who want to offer their child the choice of in-state, out-of-state and private universities.
Texas Tuition Promise Fund: Parents purchase units, which represent a fixed amount of tuition for in-state Texas public colleges; the fund covers limited eligible out-of-state and private universities. The cost of the prepaid units is determined by the age of the child and what type of school the parent believes the child may attend. The Promise units allow parents to lock in the cost of tuition (not including books or room and board), avoiding future inflation. It’s a good choice for parents who want to offer their child an education at a Texas institution of higher education.
WHY CHOOSE THIS PLAN?
529 Savings Plan: According to Hughes, a 529 plan offers the greatest benefit to parents, particularly during our current economic climate — a time at which you can buy at historically low cost. Parents also secure the advantage of tax-free investment growth. The flexibility of a 529 is priceless, adds Conway. This avenue of savings allows parents to choose where they want to allocate funds — to either higher-risk or more conservative portfolios. And, he says, unlike the prepaid units, this plan isn’t as costly up-front. The units can, in Conway’s opinion, narrow the choices your child has when it comes to where he or she will attend school.
Texas Tuition Promise Fund: With units from the Promise Fund, parents can guarantee the current cost of college — an expense that is forecasted to rise astronomically in the next 10-20 years, says DeSilva, who represents the plan for the Texas Comptroller’s office. He explains that by purchasing units, parents do not face risk of losses in their investment. Barker, who considered this option carefully for her two young daughters, says that she wasn’t turned off by the fact that the Promise Fund ensures tuition at Texas-based schools; however, she acknowleges that this opinion will vary from parent to parent.
WHAT HAPPENS TO MY SAVINGS SHOULD MY CHILD DECIDE NOT TO GO TO COLLEGE?
529 Savings Plan: The account can be transferred to a different beneficiary. Liquidating the account is an option, but the earnings will be subject to taxes.
Texas Tuition Promise Fund: The owner of the account may receive a refund; however, the value will be adjusted depending on penalties and taxes that may apply.
WHEN CAN I OPEN AN ACCOUNT? WHEN CAN MY CHILD ACCESS THE FUNDS?
529 Savings Plan: Accounts can be opened at any time; there is not hold on your account once it’s opened – you may use the funds at any time.
Texas Tuition Promise Fund: Accounts may only be opened during an enrollment period – the next period starts September 1 and runs through February 28, 2010. Purchased units cannot be used within the first three years of opening an account.
To learn more about 529 savings plans or the Texas Tuition Promise Fund, visit www.everychanceeverytexan.org.
