Paying for School Special

On average, public education costs $11,354 per year. Private universities now cost an average of $27,516 a year. By 2020 these numbers will probably quadruple. The bottom line: college can become a debt sentence! (Source: The College Board)

SUZE SAYS: Many of you have credit card debt, many of you don't have enough money to put a down payment on a home, many of you don't fund your retirement accounts and you have nothing in savings. Talk to your children from an early age about getting grants, scholarships and loans. There are no loans that you can take out to fund your retirement, but there are many loans your child can take out to fund his/her education.

Yet everyone still wants to know how it is possible to put away money for a child's education. In this special edition of The Suze Orman Show, "Paying for School", Suze teams up with Joe Hurley, a CPA and expert on paying for college.

SUZE SAYS: A college education is quite expensive but there are many ways to save money:

1. UGMA (Uniform Gift to Minors Act Account) or UTMA (Uniform Trust to Minors Act Account):
   This account is good for parents who want to manage their child's college savings but want to keep it in the child's name. It will, however, count as an asset for the child and will have a negative effect on financial aid qualifications.
2. Coverdell Educational Savings Account:
   To qualify, your income must make less than $110K if you are single, and less than $220K if you file jointly. If you qualify, you can contribute up to $2000 per year. You can open this type of account at any discount brokerage firm, major brokerage firm or mutual fund company. The money can be used for any type of school.
3. 529 Plans:
   These plans seem to cause the most confusion. Suze says Joe Hurley is one of the nation's leading expert on 529 Plans. He created the website www.savingforcollege.com and is the author of the book The Best Way to Save For College: A Complete Guide to 529 Plans. Joe explains that parents have the following options for 529 Plans:
   
   • Pre-paid Tuition Plan: These plans are only offered by a limited number of states. They are offered to state residents and targeted at children going to school in that state.
   • Independent 529 Plan: These plans are sponsored by a group of private colleges and allow an individual to pay up front for tuition at one of these colleges.
   • Savings or Investment 529 Plan: These plans are like an IRA for college. They are state sponsored; every state sets up its own plan and offers different investment options. An investment firm or mutual fund company is typically hired to run the program. An individual starts making contributions and hopes the money grows over time. There is no annual limit. Some programs allow an individual to contribute over 300K per child. This can be contributed all at once or over time. There is, however, a gift tax consequence if you contribute more than $12K in one year (this exceeds your annual exclusion).

Confusion about Savings 529 Plan:
Many people feel that because it is a state program, their child has to go to school in that state. This is not true!

WHAT IS THE DIFFERENCE IN EACH STATE'S SAVINGS 529 PLAN?

Since Savings 529 Plans are state sponsored, Joe Hurley says some states have better plans than others. Pennsylvania, for example, will tax earnings on another states' 529 Plans if a person pulls out from another state, but not if a person pulls out from its own 529 Plan. Pennsylvania also has exclusion from its inheritance tax. NY has a tax deduction of up to $10,000 per year of your contributions to a 529 Plan. Do a little research and see which state plan works best for you. For more information on each state's plan, log on to www.savingforcollege.com.

WHAT IF I NEED FINANCIAL AID? WHICH PLAN IS BEST?

According to Joe Hurley, right now, the Savings 529 plan is the best for those who will need financial aid in the future. Savings is treated as an asset of the parent so it will not have as great a negative impact on financial aid.

DO I HAVE TO CHOOSE ONE SPECIFIC PLAN?

You can have more than one type of savings plan. Joe Hurley feels that, for many people, a combination of the savings options is the best bet. You can move money from one savings plan (UGMA, Coverdell, or 529) to another plan at any time.

WHAT ASSETS FACTOR INTO FINANCIAL AID?

SUZE SAYS:

• Assets outside of retirement accounts that you have in your name and the assets that your child has in his/her individual name are factored into financial aid.
• Assets in your name count 5.6% against what is needed. Assets in your child's name count 35% against what is needed.
• Your 401(k) and Roth IRA are not a factor in determining financial aid.

ARE SAVINGS BONDS A GOOD OPTION FOR COLLEGE SAVINGS?

Joe Hurley feels savings bonds are probably not the best option. They are safe, but the interest rate is not enough to compete with the growing cost of college tuition. Your money won't grow!

SUZE SAYS: There is a legal loophole that many people are not aware of that could be helpful in financing your child's education. It has to do with the capital gains tax for 2006-2008. For this time period, if you want to pay for your child's education and you have an asset that has appreciated in value (i.e. stocks) and you are in a high tax bracket, then you would pay the 15% capital gains tax on the appreciation if you have owned that asset for more than one year. But if you gift that asset to your child (i.e. transfer it into a UGMA account) then your child will only have to pay a capital gains tax rate of 5% if he or she sells it in 2006 or 2007. In 2008, if they sell it, they will pay 0%. This is a way to legally escape the capital gains tax.

PAYING OFF STUDENT LOANS

Suze Says: "You cannot discharge student loans in bankruptcy. You have got to pay them somehow."

Forbearance: If you legitimately cannot afford to pay your student loans, forbearance is an option. You can postpone payments but the maximum time is one year and your interest rates will continue to accumulate. Suze says this is not the best option. Deferment is the better option, as interest does not accumulate in most cases.

Suze Note: Congress has made a change in the treatment of student loans. Right now the interest rate of a Stafford Loan is 4.7%. As of July 1, 2006 that interest rate is going to lock at 6.8 %. The rate of Plus Loans is currently 6.1% but on July 1, 2006 it will lock at 8.5%. If you have not yet consolidated DO SO NOW before these rates go up and stay there forever. Lock in the lower interest rates! Defer payments if you have to.

Consolidating: You cannot consolidate federal loans with private loans. You can, however, consolidate private loans with other private loans and federal loans with federal loans.

SUZE SAYS: No parent should have to be responsible for financing his or her child's education. If you want to help your child finance their education, the best way is to simply sit down, have a good conversation, and let them take out loans. They have what it takes to do it on their own!

For more information visit www.savingforcollege.com or check out The Best Way to Save For College: A Complete Guide to 529 Plans by Joe Hurley