Invest in Your Child's Academic Future

Physician's Money Digest, May 15 2003, Volume 10, Issue 9

It stands to reason that most physicianswant their children to get a good education.But when the time comes, howmuch will it cost to send them to college?It might be very pricey, or it could be reasonablyinexpensive. The truth is, a lotdepends on you. The choices you maketoday will directly affect the choices yourchild will make when the time comes forthem to decide on a college.

The bad news, according to the CollegeBoard (, isthat the total annual cost for a 4-year privatecollege in 2003 is $30,053, up almost6% from 2002. For a 4-year public college,the annual cost is $15,707, an increase of9.6% from a year ago. Those are bigbucks. But there's good news.Approximately 38% of students attending4-year schools pay less than $4000 fortuition and fees, and almost 70% pay lessthan $8000. How is that possible?

This year, a record $90 billion in financialaid is available to students and theirfamilies, an increase of more than 11%from the past year. And if you don't thinkyou qualify for financial aid, you might bewrong. At 4-year private colleges and universities,more than 75% of studentsreceive some type of financial aid.Scholarships—and there are a wide rangeof them—can also help put a dent in thecost of a college education.

When to Invest

If your children are young, there's notime like the present to begin savingfor their college education. For starters,time is on your side. Let's assume thatyour oldest child is age 3. If you put$200 away each month for 15 years andit grows at 8% a year, you'll have$69,208 when that child turns age 18.Even if you can only put away $50 eachmonth, you'll still have saved morethan $17,000. Either way, you'll be ingood shape to help finance your child'scollege education.

The Coverdells' advantage

Two of the more popular savingsvehicles are Coverdell education savingsaccounts, formerly called educationIRAs, and 529 plans. Coverdells receiveda boost a few years ago when the maximumannual contribution was bumpedfrom $500 to $2000. The contributionsaccumulate on a tax-deferred basis, andwithdrawals used to pay educationexpenses are federal income tax-free.: Savings canbe used for elementary and secondaryschool expenses, as well as for college.Savings in a 529 plan can only be usedfor higher education.

Coverdells do have their limitations,though. Married couples earning morethan $220,000 annually, or individualsearning more than $110,000, are noteligible for these accounts. In addition,when it comes time to calculate achild's eligibility for student aid, themoney in a Coverdell is counted as anasset. This asset can reduce the amountof financial aid the student receives.

In contrast, 529 plans place noincome limitations on contributors.They contain the same tax-advantagefeatures of a Coverdell account, butmany state-run 529 plans also give residentsupfront tax deductions on statereturns. Maximum contribution limitsvary by plan (eg, $100,000 to $305,000).The funds accumulated cannot be usedfor elementary or secondary schoolexpenses, but they can be withdrawnfor graduate school or technical schoolexpenses. Similar to Coverdells, if themoney is withdrawn for nonqualifiededucation purposes, it becomes taxableand subject to a 10% penalty.

"When considering a 529 plan,"advises Tim Lane, who is in charge oftuition financing for TIAA-CREF, "youshould look at the same types ofthings you would with any otherinvestment product: expenses, performance,and suitability of investments.Don't assume that because you'reinvesting for college that the money isguaranteed." In addition, Lane says,it's not necessary to choose between aCoverdell account and a 529 plan.Recent tax law changes allow individualsto contribute to both accounts.

Why Family Matters

It's easy to think of college as anexpense, but it really is an investment,and an important one at that.According to the US Census Bureau,people with a bachelor's degreeearn, on average, greater than 80%more than those with only a highschool diploma. Over the course of alifetime, the gap in earning potentialbetween a high school diplomaand a college degree or higher ismore than $1 million.

Herald Johnson, assistant vicepresident for enrollment and marketdevelopment at Augsburg College inMinneapolis, Minn, says the mostimportant thing students can do tomake themselves more attractive tofunders is to focus on academics.Performance, he says, has a directrelationship to funding.

The next step, Johnson says, is todevelop the right culture at home,the mindset that at some point yourson or daughter is definitely movingon to attend college. "You do thatby talking about it at home. Whenyou take summer vacations, visit differentcolleges. Your family mightnot necessarily be in the market atthe moment, but there's nothingmore powerful than a campus visit."Many colleges are helping tofacilitate that mindset. At CaliforniaState University, Northridge, forexample, programs start early. "Wework in partnership with lenders tobring fourth graders onto the campus,"explains Kathryn Anderson,director of financial aid and scholarshipsfor the university. "They gothrough a day of classes, then agraduation ceremony. And we makethe promise that if they finish schooland come to Cal State Northridge,they will receive a scholarship."Parental involvement is critical tothe process. But the process needs towork both ways and truly be a familyaffair. "I can sit down with a familyand tell you after a few minuteswhether or not the student has beenengaged in the college selectionprocess," Johnson says. "I can alsotell if family support is there or not.And quite honestly, we find that thestudents who are most successfulhere are not necessarily the oneswho have the best financial circumstances.They're students who knowthey have their family's support."

How to Catch Up

At the other end of the spectrum arethe parents who haven't been savingfor their child's education. In thiscase, their son or daughter is now inhigh school, and the prospect of collegeis only 2 or 3 years away. Over the years,they didn't save as aggressively as theycould have, and now they're wonderingwhere the money for their child's collegeeducation is going to come from. It maynot provide much comfort, but if you'reone of these parents, recognize thatyou're not alone in your dilemma.

The Best 345 Colleges

"About 70% of families don't thinkabout saving for college until theirkids are in high school," explains RobertFranek, editorial director for the PrincetonReview, and author of the 2002 bestsellingguidebook ($20.00; Princeton Review). "So while529 plans are terrific, they won't do youmuch good at this point."

What should you do, then? Gatheryour family together, roll up yoursleeves, and start researching. The firstarea to research is scholarships."The biggest misconception thatpeople have is that there's noscholarship for them," says MikeO'Brien, CEO of In truth, there is a wealth ofprivate money aimed at helpingstudents finance their college education.

Taming the Tuition Tiger

In her book ($18.95; Bloomberg Press; 2003), KathyKristof points out that while some scholarshipsare distributed based on need,many others go to students who have apersonal interest in or connection to thegroup sponsoring the scholarship. Websites can assist you in your scholarshipsearch. Good sites to check out onlineinclude:,,,and

Another resource often overlookedis financial aid. "A lot of families feelthat they make a fair amount ofmoney and will be penalized for it onthe financial aid level, and that simplyisn't true," Franek says. "There are certainloans, specifically federal grants,that a student doesn't have topay back."

The key is to apply, and it allstarts by completing a formcalled the Free Application forFederal Student Aid (FAFSA).The forms are available throughhigh school guidance counselors andcollege financial aid offices, but the USDepartment of Education encouragesstudents and their families to fill outthe form online. Doing so, the departmentsays, saves about 10 days in mailingand processing time.

Kristof notes, however, that theFAFSA form is long and complicated,and suggests completing a worksheetbefore filling out the form online( has a valuable worksheeton its site). When you're donewith the worksheet and ready to fillout the actual form, you'll need toknow 2 Web addresses:, where you'll find the form,, where you'll receive apersonal identification number, whichacts as en electronic signature.

Where to Turn

New products, programs, and strategiesare making college financingeven more accessible. This summer,TIAA-CREF plans to introduce the Independent529, a unique prepaid savingsplan. The Independent 529 plan willallow parents to lock in future tuitioncosts at some 300 private colleges.

"What these schools are saying isthat they will guarantee that themoney you put into this program nowwill purchase tuition at today's rateregardless of when you use it," Laneexplains. "If you put in $20,000 todayand a school costs $20,000, you havepurchased a year of tuition at thatschool. All customers will see a list ofwhat every school costs today."

The program covers tuition, butnot room and board. In addition,being in the program does not guaranteeacademic acceptance. Additionalinformation on the plan can befound at the organization's Web site,

A new emerging trend is the refinancing (or taking) of a home equityloan to help pay for college. Withinterest rates extremely low, it's anenticing proposition, but one you maywant to ignore. Instead, Franek suggestsparents might be better off witha parent loan for undergraduate students(PLUS). The loan is limited to thecost of the education, minus thefinancial aid a student may havereceived in that year.

"I think too many families feel theironly alternative is to take out a homeequity loan," Franek admits. "A PLUSloan is simply a bank loan used for educationalpurposes. Every bank givesthem out. So if a family is comfortableworking with a bank in their hometown,they can get a PLUS loan there."

On the other side of the fence, collegestudents who are approaching graduationare eyeing an average of nearly$29,000 in student loans. For studentsgoing on to medical school, those loanvalues will be considerably higher. Tohelp, has recently introduceda student loan consolidation programthat allows eligible graduates toreduce their monthly student loan paymentsby up to 54% and reach an interestrate as low as 2.25%.

"Before the 2002 tax law change, arecent college graduate could only writeoff up to 60 months' worth of studentloan interest," O'Brien explains. "That'slike saying you can only write off the first5 years of interest on your home mortgage.Now, there's no limitation on thenumber of years you can write off studentloan interest. A student can writeoff up to $75,000 in total interest overthe lifetime of the loan, whereas before,only $15,000 could be written off. That'sjust smart money."