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It's never too early -- or too late -- to find financing for college

Most parents start worrying about how to pay for college before their child is out of diapers, but that worry doesn't always translate into action.

Some parents get right to it and begin saving for college the moment their child is born. Paula and Tom C. from Seattle spoke with a financial planner when Paula was still pregnant. They have managed to put aside close to $2,000 per year since their daughter, now a kindergartner, was born. "Saving is really important for us, for her to go to college and not be limited to a community college," Paula says. (Like many parents interviewed for this story, Paula and Tom requested that their last names not be used to protect their privacy.)

Others are slow to start, but manage to put something together for a college fun before their child reaches high school. Seattle residents Doreen and Michael L. have three children, ages 10, 8 and 5, and have not invested specifically for college. "We don't know about locking our money into anything because we don't know the future that well... we do know the kids will need orthodontics," Doreen says. She plans to return to work part-time once the youngest is in kindergarten and hopes to start a college fund with the extra money.

Many parents, however, are unable to save much at all for a college fund. Alex and Peg S. of Enumclaw adopted three siblings they had fostered since they were toddlers. Peg homeschools the 12-, 13- and 15-year-old. "Our income is not high, so we really can't afford to fund a college education," Alex notes. "I feel the youngster should want it badly enough to work toward financing it. We're hoping to take advantage of programs like Running Start, and we're looking to having the kids achieve in some areas where they may be able to get scholarships."

Surprisingly, when it comes time for the children to head off to college, there are funding options for all three situations -- and everything in between. Even if you don't have a savings account, there are options.

Early savers have the best options for financial college planning, but deciding where to invest and how much to save can be tricky. College tuition far outpaces the rate of inflation for the general economy. There can be a huge difference between tuition costs at various institutions, depending on whether they are in state or out of state, public or private, large or small. Additional costs like room and board, travel, books and extra fees also factor into the grand total. Without knowing where your child will eventually enroll, it's almost impossible to determine exactly how much money they will need. So why worry?

Despite the unknowns, financial advisors and seasoned parents agree: Save as much as you can, as early as you can. Shoreline resident Rachel Z., the parent of a college sophomore and a high school senior, says it best: "You don't want your child having to start their adult life with a huge debt load."

To avoid the debt, it helps to understand how college costs are funded. Few students who apply for college have a bulging bank account that can cover all expenses for a four-year degree. Instead, most rely on a patchwork of college funding sources to get them through. This can include personal savings, private scholarships and awards, college-provided grants or work/study programs, and student loans.

Personal savings

For parents with limited resources, it's easy to start with secured bank accounts, such as a traditional savings account. They don't yield a high return, but they're a great way to build up a college fund nest egg that can be invested in something better. However, once parents have at least $500 to invest, they are better off moving to a product with a higher yield, and that's where things can get tricky.

For those who are comfortable investing in higher-risk vehicles like the stock market, it's a simple matter of meeting with their financial planner to determine the best choices. But for others, who want something relatively safe and secure, there are better options. A variety of savings plans offer good return plus the added advantage of a tax break.

Custodial accounts

Up to $12,000 per year per child or grandchild can be gifted into a custodial account tax-free through the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA). These options have downsides: Although a custodian controls the funds, once the child reaches 18, he or she has complete control -- and may prefer a new car to a college education. Also, the first $800 is generally free from federal tax, but higher yields are taxed using a complicated system based on the amount and the child's age.

The Coverdell Education Savings Account

This might be a better option, though it has an annual limit of $2,000 per beneficiary. These education savings accounts offer flexibility about who can contribute (including grandparents or other relatives) and a broad range of investment options from a number of the large-fund companies. They also qualify for the Gift Tax exclusion and, if the money is used for education expenses, the gains are not taxed. Withdrawals for other uses, however, are subject to federal income tax and a possible 10-percent penalty on earnings. There are also stipulations depending upon the parents' income.

529 Plans

These relatively new plans could be the best bet yet. Created by Congress in the late 1990s to increase college savings, they grow tax-free and withdrawals remain tax-free as long as they are used for education expenses. Though these plans were originally scheduled to be phased out in 2010, Congress voted in August 2006 to make them permanent.

The standard 529 College Savings Plan works much like a 401(k), with each state contracting with an investment firm to develop and manage its plan. Contributors usually have a choice of funds in various share classes. Nearly every state offers at least one 529 plan, and parents can invest out of state if they prefer. When it comes time to withdraw, the money can be used at any accredited post-secondary school in the U.S. Most states that have an income tax also offer tax breaks to residents who invest in their plans. Because each state has a different plan, and returns are not guaranteed, parents have to do their homework to choose the right one.

Ken Carter, a vice president and financial consultant with RBC Dain Rauscher in Kirkland, chose the State of Virginia's 529 plan for his daughters, now 10 and 11. He noted that since there is no income tax in Washington state, residents have the flexibility to choose from all of the states' plans. He chose Virginia's because it was "...very conservative -- not always the best performer, but you know it won't blow up on you." While the The Wall Street Journal and other financial publications usually rank the various states' 529 plans, Carter recommends using a professional financial advisor if you can.

Washington State offers a different type of 529 -- the Prepaid Tuition Plan. Called GET (Guaranteed Education Tuition), the plan lets parents pre-pay college tuition at today's rate with a guarantee that it will match the value of tuition in the future. Parents can purchase up to 500 "units" that are guaranteed to cover four years of tuition at the state's most expensive colleges -- currently the University of Washington and Washington State University -- and also can be used at out-of-state schools. (For a more detailed explanation of GET, see Got time? Get GET in this supplement.)

Larry Katz, a branch sales forecaster at WAMU, started investing in custodial accounts when his 11-year-old twin boys were infants. When 529s became available, he went with California's plan, then switched to a Washington GET once that became available. The Katz family now has all three accounts for diversification.

Katz recommends a GET account because it is guaranteed to keep pace with college tuition and it's tax-free. Plus, it's less labor intensive compared to traditional savings. "With mutual funds, it makes sense to decrease the investment as the child nears college age, to decrease the risk," Katz notes. "Once you get a GET, you can forget about it." He also recommends having assets in your portfolio that are not correlated with each other; the rate for GET, for example, is completely unrelated to the performance of the stock market.

Other money sources

In many cases, no matter how much you've saved for a college fund, you and your child will need to secure other funding sources. Even those with a completed GET fund might choose a private or out-of-state college that requires additional tuition, or strive for post-graduate degrees.

The three main options for additional college funding are the state and federal governments, the college itself and the private sector. This money can come in the form of gift aid or self-help aid. Gift aid includes scholarships, grants, endowments and tuition discounts that don't have to be repaid. Self-help aid is usually comprised of work-study programs and loans.

Government money

Federal money is distributed through the colleges and requires students to complete a Federal Government Financial Aid Application (FAFSA), which helps determine how much the family should contribute toward the cost of the student's education each year. The money can be in the form of gift aid or self-help aid and becomes part of the financial aid package offered by the institution. More information is available through the Federal Student Aid Information Center at 800-433-3243.

The AmeriCorps program offers college funding in return for one year of community service. The U.S. Armed Forces also offers educational programs ranging from free tuition at military academies to scholarships in exchange for service through the Reserve Officers Training Corps (ROTC) program.

Washington State currently earmarks over $159 million annually for student financial aid. This aid can be given based on financial need, achievement or specific course of study. Information is available through the Washington Higher Education Coordinating Board at 360-753-7859.

College financial aid

In today's competitive market, colleges tend to use their financial aid to attract the strongest applicants. Most schools offer students a combination of grants, scholarships, tuition discounts and work/study programs. Though schools still offer some hardship or needs-based scholarships, most are based on merit and desirability. The size of a school's endowment will also affect its financial aid offerings. Consequently, the amount of aid offered by various schools can differ dramatically.

Ann Rohlman, CFA, with Seattle-based Sonata Capital, has two daughters -- a senior in college and a senior in high school. " One of the things I didn't realize is that private schools have the latitude to offer scholarships based on academics or major that are not dependent or your assets or your child's assets," Rohlman says. Parents should also investigate money available to children of alumni, she adds, noting that her older daughter received a full scholarship to Rohlman's alma mater.

Most advisors now recommend that students apply to at least eight colleges to maximize their chances of getting accepted with a good financial aid package. It's also important for high school students to consider their attractiveness as a college candidate -- take the necessary courses, actively participate in extra-curricular activities, and volunteer for community service projects in their field of interest.

Private sector scholarships

Finaid.org states that "...four-fifths of parents expect that their children will receive scholarships." But in reality, only about 7 percent of students receive private sector scholarships. That's not to say, however, that you should ignore this source. Full-tuition scholarships are rare, but there are a myriad of minor awards -- often within reach of an Internet search -- that can make a dent in college expenses. Rachel Z. says of the small scholarships her daughter received to help pay for books, "Fifty dollars is fifty dollars you don't have to borrow."

Stan J. of Shoreline has one daughter starting nursing school and one who is a high school freshman. A disappointing performance by the family's mutual funds left them in need of college funding. Even though their financial situation gave them the ability to pay college tuition costs out of pocket, his older daughter was diligent about pursuing scholarships and government grants, using a network of friends to find funding sources.

"She received a scholarship from PLU, and cobbled together a number of smaller scholarships. These will cover her entire four years as long as she maintains a certain GPA," Stan says.

Student loans

The federal government offers a variety of loan programs for both graduate and undergraduate college students with significant financial need. These include the Pell Grant, Federal Supplemental Educational Opportunity Grant, Federal Work Study, Federal Perkins Loan and Subsidized Federal Stafford Loan. The key here is "significant" need, and parents' income is considered in the determination.

The government offers two college loan programs not based on financial need: the Unsubsidized Federal Stafford Loan and the Federal Parent Loan for Undergraduate Students (PLUS). In general, these loans have lower interest rates and more lenient repayment schedules than commercial loans. They are, however, still loans and will need to be repaid by the student and/or parents. For information, contact the Federal Student Aid Information Center at 800-433-3243.

Ann Rohlman says that if all else fails, parents should consider a home equity loan as a source for college funding, "The interest rates are generally lower, and the interest is tax-deductible." She cautions, however, against relying heavily on loans. "I just don't consider loans to be the best bet -- to me that's the last recourse. I'd strive for scholarships, grants, personal money and my child to earn money during the summers and school year. We need our children to be financially responsible. What are we teaching them if we teach that debt is the way to go?"

One family's investment story

How a yearly Christmas gift became a $55,000 college fund

In 1988, Lucy and Martin P. of Seattle were delighted when Martin's parents gave them $1,500 for their daughter Maureen's first Christmas. Knowing they wanted to invest the money for college, the couple took about two years to investigate the best options. They decided to go with a United Gift to Minors Act (UGMA) account and worked with a brokerage firm to invest in individual stocks, concentrating on local companies.

Every Christmas, Maureen would get $1,000 from her grandparents. Each January, Lucy would pick a stock - Starbucks, Costco, Washington Mutual - companies the family liked and knew were profitable. In the early '90s, they bought Microsoft three years in a row. Lucy remembers that one year, she didn't pick a good one: "It was a popular stock. I bought at the high point and it tanked after about six months."

Through a financial planner, they also bought into an environmentally responsible mutual fund, The Phoenix Fund. They later sold the fund to finance a marine biology school trip to Maui when Maureen was a sophomore in high school.

Thanks to the investments, Maureen ended up with about $55,000 by her senior year. Lucy thought they'd be set for college money, but she didn't count on the fact that her daughter wanted to attend only private, out-of-state colleges.

Along with her entrance application, Maureen and her family had to apply for financial aid using the FAFSA at all of the schools. Because Maureen's choices caught them off-guard, they didn't get a head start on applications for private scholarships. Lucy bemoans the fact that they even missed out on a chance for a scholarship from her husband's company because they would have had to apply during Maureen's junior year. In the end, they did not apply for any outside scholarships because by the time they started looking they were in the middle of the essay-filled college application process and the hectic activities associated with Maureen's senior year.

"Once December hits," says Lucy, "it's like you're on this big sled going downhill very fast and picking up speed all the way. You have FAFSA, financial aid apps, college apps, essays...and if you haven't done your research, it's too late. I told myself when Maureen was young, there's going to be some scholarship, but I was wrong."

Since Martin was a blue-collar worker and Lucy was a stay-at-home mom, they hoped they would qualify for some needs-based aid. Maureen applied to nine schools -including Western Washington University as her fallback - and was accepted to all of them. Each school offered her some sort of financial package - from a minimum of $3,000 to a maximum of $20,000 - that helped determine her final choice. All of the schools had comparable tuitions except for Western.

Lucy remembers being disappointed with some of the packages. "You're kind of shocked when you start opening the financial aid offers. You say to yourself, 'Is that it?' "

Ultimately, Maureen chose a well-respected, private college in Southern California. Her financial aid package knocked off about $18,000 from the $40,000 price tag (including room and board) in the form of a grant from the school based on need and academics, and a $3,500 work/study package. She was also able to secure a couple of small student loans in her own name at very low interest - $3,000 at 1 percent.

Maureen will have to reapply for financial aid every year, and work to keep her grades at qualifying levels, but at least -- for now -- her debt load is manageable and she is attending the college of her choice.

Andrea Leigh Ptak is a freelance writer and graphic designer who lives in south Seattle with her husband, 11-year-old daughter, one dog and three cats.


Originally published in the November, 2006 print edition of ParentMap.

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