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Like many parents, Eric Liebmann and Cathy Wilson once despaired of paying for college for their kids, Emma, 17, and Joe, 15. "When Emma was about 4, we met with a financial planner who told us we'd have to save $600 to $800 a month," says Wilson. "We just didn't have it." Later, after Liebmann's career as an architect took off with the real estate market, they played catch-up by pouring money into college-savings accounts. Now the Takoma Park, Md., family expects to manage tuition out of savings and income. "If the economy takes a nosedive, we'll adjust," says Wilson, who manages a fitness center. "It's a living plan."
Welcome to College Financing 101. The math involves real-world calculations -- such as income minus expenses times children -- along with variables such as the stock market and the economy. Lately, tweaks to the federal student-loan program, tax law and financial-aid formulas have also altered the equation. Meanwhile, the price keeps rising. Last year, a four-year stint at a private institution averaged $120,000, including room and board. An Ivy League degree topped $170,000.
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How do you solve a problem with parameters that keep changing? Start early and keep your eye on new developments, says Deborah Fox, of Fox College Funding, a network of college financial planners. Whether your child is next year's freshman or a member of the class of 2024, it's important to keep revisiting your college plan.
New rules for saving
Pity the parents who thought they were getting a tax break when they put money into custodial accounts for their kids under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Until recently, the first $850 of unearned income in a custodial account was tax-free, and the next $850 was taxed at the child's rate, usually 10%. Above $1,700, parents paid tax at their rate until the child turned 14. Then, earnings were taxed at the child's lower rate. At 18 or 21, the child took ownership of the account -- and presumably used the money to pay for college, not a Porsche.
Starting this year, however, the earnings on the account are taxed at your rate until your child reaches 18. That means a bigger tax bill if, for instance, you sell stocks and owe capital-gains tax, or the account holds interest-generating investments, such as bonds. "Because of the new tax treatment, the UTMA is a new four-letter word," says Joe Hurley, of Savingforcollege.com. "People with money in their kids' names are scrambling to rework their strategies."
One strategy is to hold on to the stock in an UGMA or UTMA account until your child turns 18 and then let him sell it. Your child is likely to be in one of the two lowest tax brackets, so he'll owe only a 5% capital-gains tax on the earnings. And, wait, it gets even better: If the sale occurs during 2008, 2009 or 2010, the capital-gains tax completely disappears for those in the 10% and 15% tax brackets.
As it stands now, however, you have little reason to risk watching your college savings peel out of the driveway in a cloud of gravel. With the tax advantage diminished, "UTMAs are almost irrelevant," says Bill Raabe, a tax professor at Ohio State University.
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