One Good Option For Facing the College Savings Challenge

ROSELAND, N.J. – Based on recent trends, the total cost of a college education at a public university for today’s newborn child will be more than $140,000. The cost of four years at a private university will be around $300,000.

How can parents prepare to meet a financial challenge of this magnitude? Valuable assistance to help families save for college is available in the form of Section 529 plans, according to personal financial planning experts at the New Jersey Society of Certified Public Accountants (NJSCPA). But there is a catch.

“You’ve got to start doing it,” says Robert M. Saunders CPA, of Mountainside. “The single most important thing you can do is to get started.”

Saunders is an enthusiastic supporter of Section 529 plans. These special savings/investment accounts, named after the section of the Internal Revenue Service code that authorizes them, provide significant benefits to contributors and allow investment income to grow tax-free. “It’s a well thought out government program,” Saunders says.

Section 529 plans are authorized by states. New Jersey has two: NJBEST, a program offered directly to consumers, and the Franklin Templeton 529 Saving Plan, which is available through investment advisors. Both plans are managed by Franklin Templeton Investments of San Mateo, CA.

Plans are also available from every other state and the District of Columbia – many offering more than one plan – so there is a wide range of investment choices. However, many states offer special benefits to their state’s residents. New Jersey, for example, offers additional scholarship funds based on the size of the investment and length of time people are enrolled. Savings of at least $1,200 over four years will earn a $500 scholarship to a New Jersey college or university. Savings of at least $3,600 over 12 years will earn the maximum $1,500 scholarship. New Jersey also has a provision that “shelters” up to $25,000 in savings in a 529 plan from appearing on financial aid application forms. This benefit helps prevent colleges from reducing their financial aid offers to families of students that have had the foresight to save for college.

The plans offer investment options that include automatic, age-based strategies that pursue more aggressive investments and higher returns while a child is younger and gradually shift to more conservative strategies as the beneficiary reaches college age. Plans also provide options for custom allocation of funds according to the owner’s preferences. For most families, Saunders recommends the more conservative, age-weighted approach. “It’s boring, but the most appropriate approach,” he says. “Getting the plan started is the most important thing. Whether you earn 8 percent or 10 percent is not significant if you don’t have anything invested,” he says.

Section 529 plans have other attractive contribution options families can use. For example, credit cards are available that direct the card’s “rewards” to your Section 529 plan. Anyone can contribute to a plan this way, even if they are not owners or beneficiaries. According to Saunders, babymint.com and upromise.com are sources for information about this option. CPAs also recommend savingforcollege.com as a good source for information about Section 529 plans.

Financial planning experts also see Section 529 plans as useful estate planning tools. “While they are good for parents, they may even be better for grandparents who often may have more pressing estate planning needs,” says Richard C. Tobin, CPA, of Tobin & Collins CPA, P.A., in Hackensack. The provisions of the plans give full control of the funds to the plan owner, not the student beneficiary, so contributors retain control over how the funds are used. Plan beneficiaries can be changed, providing additional flexibility. And 529 plans permit individuals to make a one-time contribution of up to $55,000 (five times that maximum annual $11,000 annual contribution limit). Two grandparents, could, therefore, create a fund of up to $110,000 with no gift tax implications, Tobin says.

As with any investment, 529 plans have restrictions, penalties for withdrawals inconsistent with the intended use, and other special terms and conditions. Tobin recommends consulting with a financial adviser to select the plan that best fits a family’s needs.

For more valuable information about saving for college, visit www.MoneyMattersNJ.com and click on Life Stages - High School/College. Once there, you’ll also be able to subscribe to a free, monthly electronic newsletter – Your Money Matters – that’s packed with helpful news and financial planning tips.

To start your search for a financial planner, you can use the NJSCPA’s free online referral service at www.findacpa.org. The Find-A-CPA service allows you to look for a personal financial planning specialist based on firm size, location, even languages spoken.

September 22, 2004