Other factors he says should be addressed: preparing and positioning a student to be attractive to colleges, finding the right college for your pocketbook by using other people's money (through financial aid, gifts and education tax strategies), and going through the financial aid process to gain access to the most money available.
To get any money from the government or schools, including most merit scholarships, families must fill out the federal Free Application for Financial Aid (FAFSA) form, says De Fontaine. Everyone should also find his or her own Expected Family Contribution (EFC). There's an EFC calculator on the College Board Web site (www.collegeboard.com). De Fontaine also urges FAs to share this "golden rule" with clients: Find out the financial aid process, forms and deadlines for each school being considered. There is no standard.
Darvis, who also owns College Funding Inc. in Plentywood, Mont., suggests families work with their tax accountants. "College is a cash-flow problem any way you slice it ... even for six-figure incomes," he says. Educational tax strategies available to small business owners include putting their lower-tax-bracket kids on the payroll and implementing a tuition assistance program.
Funding Methods
Despite their market risk, "over time, 529 plans are the most effective vehicle to save for college," says Andrea Feirstein, founder and managing director of New York-based AKF Consulting Group, the leading strategic advisor in the 529 college savings market.
In addition to offering tax-free compounding and tax-free withdrawals at the federal level, 529 plans layer on state tax benefits in many states and provide parents with control and flexibility, she says. They may be used for any post-secondary institution that accepts financial aid, including some schools abroad. Parents can select a new beneficiary, even themselves, if the original plan beneficiary decides to forgo college.
In contrast, funds gifted into a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) custodial account may not be transferred to another beneficiary and the minors get to decide how the money is spent once they reach age 18 or 21.
Unlike some other college funding tools, 529 plans don't impose federal income restrictions, and maximum contribution limits currently range from $235,000 to $370,000. There are 95 plans available, 59 directly to individual investors and 36 through financial advisors. The biggest trend over the past year, according to the September 2010 AKF Market Report, has been the growth in short-term, Treasury-protected and federally insured choices. AKF also anticipates the trend of fee reductions to investors will continue during the next round of program management rebids.
To learn more about 529 plans, Feirstein suggests visiting www.savingforcollege.com and www.collegesavings.org. Investors and FAs should always begin their research with the 529 plans offered in the state where the account owner (or beneficiary) resides or pays taxes because there may be specific state tax benefits or other advantages, she says.
Clients should understand the cost and potential return differences between indexed and actively managed investments, aggregate limits, how insurance aggregation rules apply to federally insured options and early withdrawal penalties for any investment, she says.
While starting to save for college the day Junior is born is best, "I tell every parent, 'Don't kid yourself, it's never too late,'" says Feirstein. "Federal tax-deferred compounding is a very powerful tool." Clients should be encouraged to put themselves on a regular savings plan rather than wait for that one-shot-a-year big contribution, she says.
Investors may also accelerate gifts up to five years at one time in a 529 plan without a gift tax, which is useful if someone sells a house or receives a windfall inheritance, she notes. Annual gifting allowances are now $13,000 as an individual, $26,000 as a married couple filing jointly.