Get your Baby to College without Making these Mistakes

BY bonnie o'connor

EducationGuide

Parents of young children beware: Everything you thought you knew about saving for college may be changing thanks to an economic downturn that has unemployment rates up, home values down and investment accounts in question. So how can you save and where should you be investing to secure your child's college-bound future—without putting your family's future finances at risk?

According to Tim Higgins, a Marlborough-based certified financial planner, author of Pay for College without Sacrificing Your Retirement and founder of collegeplusretirement.com, the most important thing parents need to do before considering college saving is to reevaluate their current and future financial needs.

"You can borrow for college, but you can't borrow for retirement," says Higgins. "Parents need to save for retirement first and be sure they are on target with that before they can even think about investing in college saving," he says.

Saving for college and retirement is not as hard as it may seem—even in this difficult economy—so long as you are smart about your investment choices and realistic about your finances. Here are six mistakes you should never make when saving for these long-term investment goals:

1. Don't Skimp on Your Retirement Savings

Higgins says that young families should be maxing out retirement accounts to meet those goals before putting money aside for college. How much should you be investing for your retirement? Online retirement calculators like those found at bankrate.com are helpful tools to keep you on track.

2. Don't Overlook the Flexibility and Liquidity of Roth IRAs

For parents who earn a combined income of $159,000 a year or less, Higgins recommends investing in Roth IRAs for college saving. Not only can you invest after-tax money that grows tax deferred, but you also can draw on Roth IRA contributions for either retirement or education expenses. If your son or daughter does not need the money for college, you simply retain it for retirement.

According to Higgins, an advantage to the Roth IRA is that you can invest in any funds that you choose and you can always access the principal tax and penalty-free, so it offers some liquidity. That may be an important factor for some families struggling during these challenging economic times.

Another benefit of the Roth IRA is that it will not be considered a financial asset when your child applies for needs-based financial aid.

3. Don't Over Fund Your 529 College

Savings Plans For parents who earn more than $159,000 per year, Higgins recommends the 529 College Savings Plan. With 529 plans, donors can contribute up to $12,000 per year, per donor, tax deferred, up to a current lifetime total of around $300,000.

Earnings in a 529 plan grow tax-free but can only be used to pay for qualified education expenses. What's nice about a 529 plan is that it can be established by anyone, including nonrelatives. You can also choose an age-based financial investment that is more aggressive when the child is younger and more conservative as he or she gets closer to college age.

Money in a 529 College Savings Plan is considered a parental financial asset when your son or daughter applies for needs-based college aid, but at a very low rate, so it would have little impact on financial aid awards.

One note of caution from Higgins: It's important not to overfund 529 College Savings Plans, since the money can only be used tax free for college expenses and is subject to a 10% penalty for all other withdrawals.

4. Don't Assume You Need to Save 100%of College Tuition

As scary as college tuition prices seem, don't assume that you need to save 100% of college costs. According to collegeboard.com, after taking grants into consideration, the net price of a college education is much lower than the published tuition and fees. In fact, for most families, the expected family contribution (EFC) for attending a fouryear private college is more affordable than you think, and public colleges and universities offer exceptional value.

Want to find out what your expected family contribution would be today? Go to finaid.com and use the EFC calculator.

5. Don't Put College Saving Ahead of Cash Flow Responsibilities

Families need to evaluate their current cash flow more closely than ever. With mortgages in flux and the high cost of living in Massachusetts, your cash flow today may look very different than it did a year or two ago—and you may not have a clear picture of how much unallocated income you have for savings.

Higgins recommends treating your household like a business and looking at your cash flow like a CEO would. Doing financial planning either on your own or with a certified financial planner will give you the insight needed to plan your investments more effectively.

6. Don't Invest in Something You Can't Afford

You wouldn't buy a Lexus if you could only afford a Corolla. Higgins urges parents to use the same common sense when it comes to investing in a college education for their children. The best college "brand" may not be the best college buy for your family based on your income. College is a purchase decision, so you shouldn't buy into something that's out of your price range. Stay focused on your retirement funds, save what you can for college, and don't let tuition sticker shock steer you in the wrong financial direction.

And what about investing in today's financial markets? "[If your children are very young], now is a great time to invest because you can buy more shares at a lower cost," says Higgins.

Bonnie O'Connor is a freelance writer and principal of Scribe Communications (scribe- com.com). She lives with her husband and three children in Holliston.

Tools of the Trade

Retirement Savings Calculator

 

Calculate your 401k earnings to see if your retirement savings is on track.

www.bankrate.com

EFC Calculator

(Expected Family Contribution) Find out how much your family will be expected to contribute toward college education costs.

www.finaid.org

Cash Flow Calculator

Know how much money you need monthly to meet everyday expenses. http://finance.yahoo.com/calculator/banking-budgeting/budgeting/bud-09

College Savings Calculator

See how much money you'll need for college, find out if you're saving enough and map out your college saving goals.

www.collegeboard.com