Develop a Smart Strategy for College Education Funding

Physician's Money Digest, May 15 2004, Volume 11, Issue 9

Everyone knows how expensive a higher education can be. But physicians, who typically spend many years of their adult lives paying off hefty student loans, are keenly aware of it. "They understand just how expensive higher education can be because they have gone through it," comments John Trott, CFP®, a financial advisor at Valeo Financial Advisors in Indianapolis, Ind. And while most might assume that physicians are better prepared for their children's college expenses, it isn't always the case. "It's amazing how many haven't done anything," Trott says.

Average Tuition and Fees

According to the College Board, average total charges (tuition, fees, and room and board) for this academic year averaged $10,636 at 4-year public institutions and $26,854 at 4-year private institutions. Just since last year, average tuition and fees increased at 4-year public institutions by 14.1% ($579), while total costs rose by 9.8%. At private institutions, tuition and fees rose by 6% ($1114), while total costs increased by 5.7%.

College Board representatives say this year's increases are high by historical standards, but the increases don't indicate unprecedented growth.

In fact, over the past 10 years, average tuition and fees have risen 47% ($1506) at 4-year public institutions and 42% ($5866) at private colleges (in 2003 dollars). This growth rate is lower than the preceding decade's, when the real rates of increase were 54% and 50%, respectively.

For physicians, expenses don't end after 4 years of college. As medical school graduates, many want to help their children pay for graduate school as well. Yet, Trott explains, it basically doubles the amount to be saved.

Good News Grants

While the numbers may be daunting, there is good news. After grants are taken into account, the net price the average undergrad pays for college is significantly lower than published tuition and fee figures. In fact, only 8% of students enrolled in 4-year institutions face tuition charges of $24,000 or more per year, according to the College Board.

Last academic year, a record $105 billion was distributed in student financial aid—$13 billion more than the previous year—and total aid per full-time student averaged about $9100 ($3600 in the form of grants). About half of all college students receive grant aid from at least one source. A public college student receives an average of $2400 in grants, while a private college student receives an average of $7300.

"Don't discount the opportunities out there for grants and scholarships," Trott says. "A lot of physicians assume that because they make 6-figure salaries, their children won't qualify for any kind of aid. It's one thing a lot of people tend to overlook."

While most federal grant aid is indeed need-based, a decreasing portion is distributed according to need, the College Board says. Additionally, a quarter of state grants are now non–need-based. While College Board President Gaston Caperton says the relative decline in need-based aid is disheartening, for physicians' children it could mean more help is available.

529 Savings Plans

Of course, the best way to plan for college is by saving— and the sooner the better. Physicians who start investing for a newborn will watch their money compound over the years, while those who take out loans will repay the loans plus interest. Essentially, the money you pay for college can work for you or against you.

If there is one financial plan synonymous with saving for college, it's a 529 plan. Operated by the states and educational institutions, 529s come in two basic forms: savings plans and prepaid tuition plans. A 529 savings plan offers several benefits, including the following:

  • Tax deferral

Tax-free withdrawals when funds are withdrawn for college. However, the tax-free distributions face a sunset in 2010—though a permanent extension is currently under proposal in Congress.

  • A variety of flexible investment options, which can be altered as your needs change

Easy access (open to anyone)

  • Substantial investment amounts (over $230,000 per beneficiary in many state programs). To save more, you can have plans in more than one state, since they don't aggregate amounts across borders.

Flexibility. The beneficiary of the 529 savings plan can be changed and the money can be used at any qualified educational institution.

  • Tax advantages. Approximately half the states give their residents a tax break for contributing to their state's 529 savings plan.

Introduced largely in 1997, every state now has at least one 529 plan. In fact, there are now over 100 plans available. With so many, how do you find the right one? A good place to start is SavingForCollege.com, which offers a state-by-state comparison of savings plans and is run by 529 expert Joseph Hurley.

Hurley says to consider your state's program first, since you may be able to take advantage of tax breaks. However, if your state's plan doesn't offer tax advantages or penalties—or simply doesn't meet your needs— then shop around. Hurley says to find one that suits your investment style—be it conservative or aggressive.

A helpful feature can be an age-related option, whereby investments automatically become more conservative as the beneficiary nears college age. Ultimately, look for a 529 that "has investments that suit you at a cost that's reasonable," Hurley says.

"One of the biggest factors is cost," Trott asserts. "Some are saddled with fees and commissions, which drag on the performance." Trott warns that in some cases expenses may nullify state tax breaks. "The amount that goes to the bottom line can easily be offset by fees." In fact, just in March the SEC formed a task force to study 529 fees and expenses.

While Trott emphasizes that "there's no cure-all out there," he recommends 529 plans provided by TIAACREF or Vanguard. Currently, his firm is recommending the MO$T plan in Missouri. He has invested in the Michigan Education Savings Program for his own daughter and says it's similar enough to Missouri's plan that he's staying with it.

Trott says it's best to put the Section 529 plan in your spouse's name for liability reasons. Use your child only as the beneficiary so it doesn't affect their financial aid.

Prepaid Programs

The other aspect of 529 plans are prepaid tuition programs. Through these programs, parents pay money to essentially lock in a certain amount of tuition at today's rates, which can then be used at a future date.

There are approximately 18 prepaid programs for state public institutions, although unfortunately some are now closed to enrollment or hiking their prices. "Prepays have a tough challenge," Hurley comments. Sometimes, tuition increases more rapidly than a program's ability to gain earnings—so the state loses out. Last summer, the Texas Guaranteed Tuition Plan, the second largest prepaid tutition program, closed its doors to new participants, and the plan seems to be on hold indefinitely.

But other prepays—such as Florida's program, the largest in the country—are still going strong. And this past fall an exciting new entry joined the prepaid tuition plans. Dubbed the Independent 529 Plan, it's the first prepaid tutition plan for private colleges and universities.

BusinessWeek

Over 200 schools participate in the plan—including heavy hitters such as Princeton, Smith, and Wellesley—and they all offer a certificate discount rate of at least 0.5%. named it one of the "Best Products of 2003," and Trott comments, "I think it's a great program, it's really going to fill a niche." For more information, visit www.independent529plan.org.

Free Money

As a final note, remember to take advantage of free ways to earn money for college. Through Upromise (www.upromise.com) you can earn money for college simply by purchasing participating products or spending money at participating businesses that pay back a certain percentage into your Upromise account—which can be linked to a 529 savings plan.

There are also credit cards, such as the Citi Upromise Card, Fidelity Investments 529 College Rewards, The Education Plan 529 Advantage MasterCard, and other cards that earn 1% to 2% toward a 529 account.

And don't forget grandparents. They can add a tax-free 529 plan for their grandchild into their retirement plan—as well as sign up for Upromise. Trott points out that wealthy grandparents trying to reduce their estate can pay for a grandchild's semester of college with no gifting restrictions. Simply write a check to the school.