With this issue, Below the Line begins a financial advice column for the members of our community, many of whom are self-employed. We kick it off, appropriately enough, with tips on financing a college education. Future columns will address issues like money management, buying vs. renting, credit unions vs. banks, safe and risky investments, maximizing tax deductions, and other considerations important to financial management for freelance workers.It’s back-to-school time again. Many parents are just starting to deal with the realities of college costs, as others with younger kids ponder the future. For freelancers and staff workers alike, especially those with more than one child, paying for college is one of the most daunting expenses they’ll ever face.But it’s not an expense they want to forego. While going to college does not guarantee success in life, recent studies have shown that those with a college degree earn, on average, approximately $23,000 per year more in income than those with only a high school degree. But the reality is that college costs for the last 15 years have increased at roughly twice the overall rate of inflation, which means that more and more young college graduates have to deal with crushing levels of student loan debt.There are many ways to fund a child’s college education, and most families will use a combination of techniques. If you’d like to help your child with college expenses, here are some tools.529 PlansThese plans get a lot of press and should be taken advantage of whenever possible. The advantages to a 529 Savings Plan are: earnings in the account grow tax-deferred, much like an IRA; qualified distributions are tax-free; you maintain control over the investment choices; you can put away large sums of money (as much as $300,000 in some states); the value of the account has less impact in financial aid calculations and, depending on your state, there may be tax deductions for your contribution.So why wouldn’t everybody use a 529 plan? The biggest drawback is that, if your child doesn’t go to college, you will potentially pay income taxes and penalties on the earnings in the account. To avoid this, you can transfer the account to qualified relatives, or even to yourself if you’d like to go back to school.Coverdell Education Savings Accounts (ESA)The Coverdell Education Savings Accounts are similar to 529 plans in that the account grows tax-deferred, qualified distributions are tax-free, and they generally have the same financial aid treatment. The primary advantage these accounts have over 529 plans is that they can be used for elementary and secondary school expenses, not just college expenses. In fact, many parents will contribute to both an ESA and a 529 plan to provide more flexibility.The disadvantages of this type of plan are that the contribution limit is much lower ($2,000 per year), the account will be distributed to your child by age 30, even if they don’t use it, and, unlike a 529 plan, you can’t switch it to another person.Financial AidThe reality is that roughly two-thirds of undergraduate students graduate with some debt, and financial aid is a way of life for most students.Scholarships may be offered by any number of different organizations, including universities, community organizations and private foundations, and are reserved for students with special qualifications, such as academic, athletic or artistic talent. Awards are also available for students who are interested in particular fields of study, who are members of underrepresented groups, who live in certain areas of the country or who demonstrate financial need.One of the best online databases of available scholarships is www.fastweb.com. On this site, you can enter your profile, provide an email address, and it will notify you when new scholarships that match your profile are added to the database.Loans are available for both students (Stafford and Perkins loans) and parents (PLUS loans). The advantage of Stafford, Perkins and PLUS loans is that the government sets the maximum interest rates and fees lenders can charge. In addition, the student loans (Stafford and Perkins) are generally subsidized by the government, offering a below-market rate.Home EquityWith the boom in real-estate prices over the past few years, many parents are choosing to tap some of their home equity to help fund a portion of their childrens’ college expenses.While home equity is still debt, the advantage to using this type of financing over other types is that, within certain limits, the interest you pay on a home equity loan or line of credit is tax-deductible, making the after-tax cost of the loan lower than other alternatives. In addition, you can spread the payments over a number of years to reduce your monthly outlay.As with any other debt, you need to make sure that you don’t take on so much that it jeopardizes your financial stability.The Bottom LineFor many people, paying for their children’s college expenses will most likely be the biggest financial commitment they make besides purchasing a home. By planning and saving while the child is young, and creatively using all the tools available to finance an education, even middle-class people and freelancers should be able help their children achieve the goal of a college education.Rob Jupille is president of RTJ Financial Management and can be reached at [email protected].
Written by Rob Jupille
