FINANCIAL COMPASS

Donald Hutchinson

According to Fidelity, the average cost of college for 2015-2016 was $17,123 for in state public colleges and $41,028 for private college.

Costs seem to go up every year, often in excess of expected inflation. Part of the reason might be the relative ease to get a student loan.

(Hey! Raise the tuition, the students will just borrow more!)

One idea to hold down costs would be to limit the amount of student loans to schools that have a relatively high default or late-payment record regarding their graduates. I guess it just bugs me that they don’t operate like a competitive business.

Of all of the ways to save for college, the 529 Plan is regarded as an appropriate vehicle to use. Balances may be distributed tax-free for qualified education expenses. They include items such as tuition, fees, books, supplies, and certain equipment as well as room and board.

In most cases, accounts are set up by parents or grandparents to fund education for children. The earlier you start the better.

The main advantage of the accounts is tax-free income and capital gains so the longer the pot simmers the better. Each state has its own plan, often in conjunction with one of the well-known money management firms. You do not need to be a resident of any particular state to use a plan.

Consideration should be given to state tax credits or partial credits, expenses, investment selection and performance track record.

As expensive as college can be, the last thing you want to do is reduce any possible financial aid.

If the owner is a parent, only 5.6 percent of the assets must be claimed on the financial aid application, Free Application For Financial Aid.

Any assets owned by the beneficiary are counted at the rate of 20 percent. If the owner is other than a parent, there is no inclusion for FAFSA calculations, but distributions are reported as income to the beneficiary.

Strategy to mitigate this problem might be for accounts to have owners who are not parents until the last year of college when aid forms will have been submitted without any reporting required. Then switch the owner to the parent where no income liability would be recognized from the now-parental ownership in the last college year.

In 2016, the 529 savings plan offers attractive tax benefits and the ability to contribute up to $350,000. (Limits vary by state)

Grandparents, for instance, can take advantage of the $14,000 ($28,000 for married couples) annual exclusion from estate tax and even combine five years of contributions $70,000 ($140,000 for married couples) in one lump as if you had given over five years.

Remember sooner is better. Any gifts over these limits would reduce the life time federal estate tax exclusion of $5.4 million. Thankfully most of us won’t be losing sleep over that one!

Unlike the old uniform gifts to minor’s accounts, the money remains in the control of the owner and does not automatically revert, at 18 years of age to the minor.

The owner has total control of the distributions. If the beneficiary does not exhaust the account, the owner may designate another beneficiary.

If the beneficiary receives a scholarship, the owner may reclaim that amount, only paying taxes on any earnings.

As a last resort, if there are no likely beneficiaries, the owner may withdraw the money paying taxes and a 10 percent penalty on the earnings.

The contribution amount was already taxed and therefore not subject to either taxes or penalties.

Plans vary, but most offer pre-built portfolios tailored to the number of years until college begins or funds are needed.

The idea is: The longer the time-frame, the more growth-oriented the portfolio. The shorter the time- frame, the more income-oriented and less volatile.

Owners may, of course, make their own choices from the sponsor’s list. In choosing the investments it is probably wise to consult an adviser about all choices, including which plan to use.

The best portfolio allocation is only worth the performance of its pieces. I believe the best strategy is to “go big early.” If that’s not possible, then consistent contributions, preferably automatic debit type, are a good idea.

While all this sounds logical, I believe that it should not actually be the parents’ first priority. That is saving for retirement. Remember, you can borrow to go to college, get scholarships and financial aid, but none of this is available for retirement.

Questions may be answered by contacting Hutchinson at donald.hutchinson@lpl.com., 203-301-0133.

Hutchinson lives in Milford, Safe Harbor Financial Management Securities offered though LPL Financial, Member FINRA/SIPC.

The opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risks including loss of principal. No strategy assures success or protects against loss.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal adviser.