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Financial Planning for College

Tips for a brighter future

College Savings

You probably started thinking about it when your child was very young. You may even have thought about it before your child was born, perhaps while you were shopping for a bassinet and a teddy bear. After all, it's one of the major responsibilities you face as a parent: your child's college education.

Personal growth and expanded horizons are reason enough to send a child to college, but there are more practical considerations, too. College graduates have more jobs to choose from, and they generally make more money than people who only have a high school education. That makes a college education very important for your child's future.

 

Once saving becomes part of your budget, money will begin to accumulate. It’s important to take advantage of the financial strategies that will help your savings grow in value. Perhaps the most important thing you can learn about saving is the importance of compounding — given time, compounding makes small investments large. Consider the following hypothetical example:

The week the McMillans had their first child, David, they opened an educational savings account. It wasn’t always easy, but they managed to put $200 away each month until David was 18 and ready to go to college.

The Rileys’ child, Barbara, was born the same month as David McMillan. Since money was tight for them, they decided to delay opening a college savings account until they were earning more. When Barbara turned 9, they opened the account and were able to contribute $600 a month until she was ready to go to college at age 18.

Both the McMillans and the Rileys invested their educational savings in the same college fund. It earned 8 percent compounded annually. The McMillans’ total contribution was $43,200 and the Riley’s total contribution was $64,800. Which family do you think had the larger college fund?

You’ve probably guessed the answer. The McMillans had the larger college fund at $96,657 — they accumulated more than $53,450 in compound interest on their investment of $43,200. The Rileys had nearly as much — their college fund was worth $95,087— but they had to invest $64,800 to do it. As you can see, time is a critical component to make investments grow. It’s not just how much money you save that counts, it’s also how much time you have for that money to work for you. You need to start saving as early as possible.

Note that these are theoretical examples presented to illustrate the power of compounding; they do not take into account taxes, account fees, or inflation. Specific interest rates or conditions used in the examples may not be attainable or desirable.

 

 

This article provides a brief overview of common types of savings and investment vehicles used to save for college. In some cases, you may face complicated tax issues particularly when withdrawing the money to use for college. To realize the full benefit of these instruments, consult with a tax professional before committing your funds. You might also want to read IRS Publication 970, Education Tax Benefits.

Savings Accounts

A savings account is a good place to store emergency funds and money that you will need to spend in the short- to intermediate-term because your principal will not fluctuate. Funds are readily accessible and the Federal Deposit Insurance Corporation (FDIC) will insure savings accounts up to $250,000 through December 31, 2013. The main drawback is low return. The interest rate paid on a savings account is often less than the rate of inflation, so your money may not grow as fast as the rising cost of college. On the other hand, the money is safe and very liquid. It is a good choice for the money that you are going to use to pay for college in the short- to intermediate-term.

Money Market Accounts

Money market accounts usually earn slightly higher interest rates than savings accounts but still allow easy access. Some banks and financial institutions require an initial deposit of $1,000 or more and limit the number of withdrawals you can make during a given period of time. Money market accounts issued by banks are FDIC-insured against loss of principal; those issued by other financial institutions are not. Money market accounts are another good choice for the money that you are going to use to pay for college in the short-to intermediate-term. To get information about FDIC insurance, including whether or not your bank is insured, go to: www.fdic.gov/index.html.

Certificates of Deposit (CDs)

Bank CDs generally earn more interest than savings accounts with equally little risk, but with less liquidity. Like savings accounts and bank-issued money market accounts, the FDIC will insure them up to $250,000 through December 31, 2013. Your principal will not fluctuate. CDs provide higher interest rates; in exchange, you agree to keep your money in the CD for a fixed period, usually three months to five or ten years. There is usually a penalty for taking money out before the end of the surrender period. Make sure the CD is scheduled to mature before you need the money.

U.S. Savings Bonds (Series EE and Series I)

U.S. Savings Bonds are a safe way to invest your money for a guaranteed, government-backed rate of return. One of the primary benefits of savings bonds is that they are exempt from state and local income taxes and, if you qualify, may be exempt from federal taxes when used for qualified college expenses. There are two major types of U.S. savings bonds – EE Bonds and I (inflation-adjusted) bonds. Both can be purchased for as little as $25. Both have a three month’s interest early redemption penalty if you redeem them within the first five years of purchase.

Mutual Funds

A mutual fund is a professionally managed pool of investments. The fund may invest in various securities such as stocks, bonds, money market instruments or various other types of investments. It may be broadly diversified or it may own only a small amount of securities. Diversification helps reduce risk but it does not eliminate risk. Every share of the mutual fund represents a proportional share of ownership of the fund’s portfolio as well as a proportion of the gain or loss that the portfolio generates. Investing in mutual funds as opposed to investing in individual stocks allows you to participate in the growth potential of the stock market with lower potential risk. Mutual funds can help you diversify your investments, and while not guaranteed, diversification can help balance risk.

If you invest in mutual funds, your principal will fluctuate. The value of a mutual fund will go up and down as market conditions change. Your principal is not guaranteed and your return is not guaranteed. Mutual funds are not FDIC-insured, even when they are sold through a bank. You can start investing in mutual funds with a relatively small amount of money. You need to carefully consider the potential risk and when you will need the money before you invest. Because of the principal fluctuation, you will need to move your money out of mutual funds into safer investments as the time approaches when you are going to need the money to pay the college bills.

Note that mutual fund companies are required by law to provide you with a prospectus before you invest. A prospectus is a legal document providing detailed information about the mutual fund’s investment strategy, fee structure, and operations and is available from your registered representative. Carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about any mutual fund investment, read the prospectus carefully before you invest. Investment return and principal value will fluctuate with changes in market conditions such that shares may be worth more or less than original cost when redeemed. Diversification cannot eliminate the risk of investment losses.

 

 

529 prepaid tuition plans are college savings plans that are guaranteed to increase in value at the same rate as college tuition. For example, if a family purchases shares worth half a year’s tuition at a state college, these shares will always be worth half a year’s tuition — even 10 years later, when tuition rates may have significantly increased.

The main benefit of these plans is that they allow a student’s parents to lock in tuition at current rates and negate any future inflation of tuition prices. The plans’ simplicity is also attractive, as they do not involve investments and can be used to pay tuition costs directly. The plans also involve no risk to principal, and often are guaranteed by the full faith and credit of the state.

Most prepaid tuition plans are operated by state governments, with the tuition guarantee based on an enrollment-weighted average of in-state public college tuition rates. These plans are subject to variation state-bystate. A few have separate plans for two- and four-year colleges and for room and board. If the student attends an in-state public college, the plan pays the tuition and required fees. If the student decides to attend a private or out-ofstate college, the plans typically pay the average of in-state public college tuition. The family will be responsiblefor the difference, if any.

529 College Savings Plans. Unlike prepaid tuition plans, these plans do not lock in tuition rates and make no guarantees. The value of investments in these plans will fluctuate based on the investment vehicles chosen and market conditions; savings may not be enough to cover all college expenses. Most 529 savings plans offer a variety of investment options such as stocks, bonds and money market accounts as well as age-based investment options that are invested based on the number of years until the funds are needed.

529 plans are state-sponsored investment programs. You should consider the potential tax benefits (if any) that your own state plan offers to residents prior to considering another state’s plan. The maximum permitted account balance (per beneficiary) will be specified by the plan you choose. It is over $300,000 in many state plans. In most state plans, the minimum contribution is small. Unlike some college savings vehicles, the 529 plans do not impose income restrictions on contributors. Contributions may be made by parents or others, e.g., gifts from grandparents. In 2012, $13,000 per donor for each beneficiary is eligible for the federal gift-tax exclusion.

Unlike prepaid tuition plans, the monies from the account may be used at any qualified institution of higher learning within the United States. If your child does not go to college, the money can be used for another family member’s qualified education expenses or you may withdraw the money and pay taxes and a 10% federal tax penalty, and in some states additional state penalty taxes may apply. A 529-plan locator to determine the plan(s) available in your state is at www.collegesavings.org. Also, see For More Information below.

Please note that assets in a 529 plan could impact the beneficiary’s ability to qualify for grants and student loans. Annual asset charges for a 529 plan may be higher than corresponding share classes of underlying mutual funds. Municipal fund securities are sold by offering statement, which is available from your registered representative. Please carefully consider investment objectives, risks, charges, and expenses before investing. Federal tax law allows one 529 account per beneficiary to be rolled over in any 12-month period without changing beneficiaries.

Municipal fund securities are sold by offering statement only, which is available from your registered representative. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest.

 

 

The federal government encourages educational savings by providing tax breaks. These include tax credits (i.e., you subtract the credit directly from the amount you pay in taxes), tax deductions (i.e., you subtract the deduction from your income before calculating the taxes) and tax deferral. The government allows you to defer income taxes on certain college investments and, in some cases, pay no taxes on interest and earnings if used for qualified education expenses. It may be possible to take advantage of more than one of these tax incentives for saving for college, but the process is sometimes very complicated. Most tax breaks impose income limitations which means that the tax breaks phase out or are completely eliminated above certain levels of income. Check with a tax professional before committing your funds in anticipation of getting these tax breaks.

Lifetime Learning Credit (LLC)

You may use the Lifetime Learning Credit to reduce your tax by 20 percent of the first $10,000 you pay for qualified tuition and related expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Eligibility to claim the Lifetime Learning Credit is also subject to certain income limitations that change periodically. For more information on the income limitations as well as other qualification requirements, please refer to IRS Publication 970 available at www.irs.gov.

Parents with more than one child may claim an LLC for one child and an American Opportunity Education Credit for a different child in the same year. The two credits, however, may not be claimed in the same year for the same child.

Deduction for Qualified Higher Education Expenses

This deduction allows taxpayers to deduct $4,000 of qualified higher education expenses. You cannot deduct higher education expenses on your income tax return if you or anyone else claims an American Opportunity Education Credit or Lifetime Learning Credit based on those same expenses. Eligibility to claim the deduction for Qualified Higher Education Expenses is also subject to certain income limitations that change periodically. For more information on the income limitations as well as other qualification requirements, please refer to IRS Publication 970 available at www.irs.gov.

Coverdell Educational Savings Account

You are able to establish a college savings plan called a Coverdell Education Savings Account (ESA) for the purpose of paying education expenses. The earnings from the account are not taxed and withdrawals from Coverdell ESAs are tax-free when used to pay for qualified educational expenses. The account may be opened on the day your child is born; and contributions are allowed until your beneficiary reaches age 18.

Contributions may not exceed $2,000 per child per year. The amount is per beneficiary, and not per contributor. So if you have three children, you could contribute up to $2,000 for each of them, bringing your total to $6,000 annually. Eligibility to contribute to a Coverdell ESA is also subject to certain income limitations that change periodically. For more information on the income limitations as well as other qualification requirements, please refer to IRS Publication 970 available at www.irs.gov.

The Coverdell ESA account allows you to make withdrawals to pay for qualified elementary, secondary, and college expenses. An extensive list of qualified expenses is available in IRS Publication 970. Neither ordinary income tax, nor the 10 percent penalty applies if the distribution is used for qualified education expenses. Currently, you may also claim either a Hope or LLC credit in the same year as the distribution from the Coverdell ESA account, however, not for the same expenses. If you double-dip by trying to claim either the American Opportunity Education Credit or Lifetime Learning Credit and take a distribution from your Coverdell ESA account for the same expenses, you will be subject to taxes and a penalty.

Student Loan Interest Deduction

Many families find that their college savings is not enough to cover the entire cost of a child’s education. If you take out a qualified student loan, in your name, to pay for your child’s education, the interest on that loan may be deductible as long as the child was your dependent when the loan was received. If a child who is no longer a dependent takes out a loan in their own name, they may be able to deduct the interest. Note that a qualified loan is one used to pay qualified education expenses as detailed in IRS Publication 970.

The maximum amount of interest deductible on a qualified student loan is $2,500 — per return. Similar to the other tax breaks, there are also income restrictions and the definition of qualified education expenses is different than for other education tax breaks.

Custodial Accounts

Under the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA), an adult can invest money for a child in a custodial account. Because a portion of the investment income is taxed at the child’s lower rate, this can help offset the cost of saving for education.

There are two potential drawbacks to investing with an UGMA/UTMA. Once the child reaches a specified age (usually 18 or 21, depending on the state), the money legally belongs to the child and might not be spent on higher education. In addition, financial aid offices will generally expect a family to use a greater percentage of a child’s assets than the parents’ assets to pay for college. By investing in your child’s name, you may reduce the amount of financial aid you are eligible to receive.

Please Note: Prior to investing in an UGMA/UTMA 529 plan account, you must liquidate the UGMA/UTMA account and pay all applicable taxes. Consult your own tax or legal advisor regarding your specific situation.

 

 

It is important to understand that most tax breaks have income limitations. This discussion of tax considerations provides only a general overview. Tax laws are very complicated and they are constantly changing. Additionally, the definition of qualified expenses varies by the type of tax break and changes periodically. Consult a tax professional or financial advisor before investing, and review investments regularly. In particular, if you move money from one account to another there may be tax implications. If you are unsure of the implications, always seek professional advice.

More Possibilities for Revenue

Even if you start early, it may be impossible to save enough for your child’s college education. That doesn’t mean, however, that college is out of the question. You have other cost-saving options available.

Student Strategies

Students can follow a variety of strategies to help reduce their expenses prior to entering college and once they’re in college. For example, many college students are able to work at part-time and summer jobs to help subsidize their tuition or for entertainment money. Be aware, however, that money earned by the child prior to college may reduce his or her eligibility for financial aid.

Some colleges offer cooperative education programs where students rotate study with periods of career-related work, allowing them to earn money and credits at the same time. However, it may take more than four years to complete a degree through a cooperative education program. Ask the college admissions office about the specifics of their program.

Depending on a child’s scholastic ability, he or she may be able to earn college credits by taking college courses or Advanced Placement exams while still in high school. First- and second-year college students can also take College Level Examination Program tests for course credit. These options can represent a significant savings over the cost of a course in the classroom. Check with your child’s high school guidance counselor or with the college admissions office for eligibility requirements and program specifics.

Another cost-saving possibility is for your child to attend a community college for the first year or two, then transfer to a four-year college to complete a degree. This can be a more affordable approach to receiving a degree from a prestigious institution. Also, colleges that are highly competitive for freshman applicants are often less competitive for third-year applicants.

Financial Aid

The traditional sources of financial aid include scholarships, grants, workstudy programs and government loans. Your child’s scholastic record, course of study, athletic ability, and choice of college are just a few of the variables that may affect the availability of these options. The Internet can provide information about billions of dollars of scholarship money available each year. There are several very good scholarship search Web sites. For More Information, see below for Internet addresses.

If your family meets certain financial criteria, the federal government has a program of low-interest loans with extended payment terms. Relying too heavily on loans, however, can burden graduates with large debts just when they are working to establish financial independence.

 

 

Even if you start saving early, it may be impossible to completely prepare for paying for college. That doesn't mean, however, that college is out of the question. You have other cost-saving options available.

Student Strategies

Students can follow a variety of strategies to help reduce their expenses prior to entering college and once they're in college. For example, many college students are able to work at part-time and summer jobs to help subsidize their tuition or for entertainment money. Be aware, however, that money earned by the child prior to college may reduce his or her eligibility for financial aid.

Some colleges offer cooperative education programs where students rotate study with periods of career-related work, allowing them to earn money and credits at the same time. However, it may take more than four years to complete a degree through a cooperative education program. Ask the college admissions office about the specifics of their program.

Depending on a child's scholastic ability, he or she may be able to earn college credits by taking college courses or Advanced Placement exams while still in high school. First- and second year college students can also take College Level Examination Program tests for course credit. These options can represent a significant savings over the cost of a course in the classroom. Check with your child's high school guidance counselor or with the college admissions office for eligibility requirements and program specifics.

Another cost-saving possibility is for your child to attend a Community College for the first year or two, then transfer to a four-year college to complete a degree. This can be a more affordable approach to receiving a degree from a prestigious institution. Also, colleges that are highly competitive for freshman applicants are often less competitive for third-year applicants.

Financial Aid

The traditional sources of financial aid include scholarships, grants, work-study programs and government loans. Your child's scholastic record, course of study, athletic ability, and choice of college are just a few of the variables that may affect the availability of these options. The Internet can provide information about billions of dollars of scholarship money available each year. There are several very good scholarship search websites. See For More Information for Internet addresses.

If your family meets certain financial criteria, the federal government has a program of low-interest loans with extended payment terms. Relying too heavily on loans, however, can burden graduates with large debts just when they are working to establish financial independence.

 

 

A tool to help you determine how much you need to save for your child’s education, Monthly Savings Needed to Accumulate $100,000, appears below. To use the tool, you’ll need a good estimate of the cost of your child’s education, based on the year in which you expect he or she will enter college. To come up with an estimate for specific years and/or specific colleges, you can use the calculator at the College Board Web site, http://apps.collegeboard.com/fincalc/college_cost.jsp, or another calculator available on the Internet.

Once you’ve estimated the total cost of your child’s education based on
the year in which he or she will begin, you’ll be able to determine how
much you need to save on a monthly basis to reach your goal. The table
shows monthly savings amounts based on number of years you have to
save and projected savings growth. This hypothetical example is for illustrative purposes only.

Monthly Savings Needed to Accumulate $100,000
Number of years or savingsAnnual Rate of Growth Savings
4 percent6 percent8 percent10 percent
5 years$1,508$1,433$1,361$1,291
10 years679610547488
15 years406344289241
20 years273216160132
25 years19514410575


If you project your savings and investments will earn six percent, and you have ten years to accumulate savings, the table shows that you will need to put away $610/month to accumulate $100,000. Returns mentioned are hypothetical, and are not intended to reflect any actual investments.

Assume that instead of $100,000 you want to save $160,000. That amount is 1.6 times as much as $100,000. Therefore, instead of saving $610/month, you would need to multiply $610 by 1.6 to determine how much to save monthly; in this case you need to save $976/month to accumulate $160,000 for college costs.

More examples for adjusting the savings—up or down from $100,000—appear below.  This hypothetical example is for illustrative purposes only.

Example of Adjustments for Calculating Your Required Monthly Savings
If you need a total ofIf you would save this amount each month to reach $100,00The ratio you multiply times the amount in 2nd Column isGiving you the new monthly savings amount of
$93,000$1,508x 0.93= $1,402/month
$145,000$289x 1.45= $419/month
$240,000$216x 2.40= $518/month

Going Forward

It’s true—college is expensive. But as you can see, there’s a lot of help available: loans, grants, and tax breaks that can significantly lower the bill. Bear in mind, though, nothing can replace a carefully planned savings and investment strategy, and the earlier you start the more likely it is you’ll reach your goal. Given how important a college education is to your child’s future, today is the best time to begin.

 

 

Free Brochures

The quarterly Consumer Information Center Catalog lists more than 200 helpful federal publications. Obtain a free copy by calling 888-8-PUEBLO or on the Internet at www.pueblo.gsa.gov.

Helpful Web sites

www.collegeboard.com
The College Board Web site has a wealth of information on topics such as choosing a college, applying to college, and paying for college. There are also financial calculators and a scholarship search tool.

www.collegesavings.org
The College Savings Plans Network Web site contains a 529 plan locator to determine what plan(s) are available in your state.

www.finaid.org
The SmartStudent™ Guide to Financial Aid Web site provides links to several free online scholarship databases, as well as on many educational savings opportunities.

www.savingsbonds.gov
This is the official source for savings bond information.

www.irs.gov/publications/p970
IRS Publication 970, Tax Benefits for Education

www.collegeanswer.com
The Sallie Mae College Answer Web site has information on many topics relevant to choosing a college and financing a college education.

www.fafsa.ed.gov
The federal government is a major source of financial aid. Start by filling out the Free Application for Federal Student Aid available on the Internet.

Because the content of newsgroups and websites changes constantly, it is impossible for us to review it all. MetLife is not responsible for the content of any of the above links.

 

529 Plans are state-sponsored investment programs. There is no guarantee by the issuing municipality or any government agency. There may be tax benefits and other advantages to plans offered by your resident state. You should consider the potential benefits (if any) offered to residents by your own state's plan (if available) prior to considering another state's plan.

With very few exceptions, if withdrawals are made from a 529 Plan for purposes other than education, they are considered non-qualified withdrawals, and they are subject to federal - and possibly state - tax penalties. Specifically, the earnings portion of the non-qualified withdrawal will be included in the recipient's gross income for federal tax purposes, the earnings will be subject to a 10% federal tax penalty, and in some states, additional state tax penalties may apply to the earnings. As with all tax-related decisions, consult with your tax advisor. Please note that assets in a 529 Plan could impact the beneficiary's ability to qualify for grants and student loans. Annual asset charges for a 529 Plan may be higher than corresponding share classes of underlying mutual funds.

Municipal fund securities are sold by offering statement, which is available from your registered representative. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest. Investment return and principal value will fluctuate with changes in market conditions such that shares may be worth more or less than original cost when redeemed. Diversification cannot eliminate the risk of investment losses.

Federal tax law allows one 529 account per beneficiary to be rolled over in any 12-month period without changing beneficiaries. Prior to investing in an UGMA/UTMA 529 Plan account, you must liquidate the UGMA/UTMA account and pay all applicable taxes. Consult your own tax or legal advisor regarding your specific situation.

Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. You should seek advice based on your particular circumstances from an independent tax advisor.

MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.

This web page, as well as any recommended reading and reference materials mentioned, is for general informational purposes only. It is issued as a public service and is not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Text may be reproduced with written permission only. Reproduction of any graphical image, trademark or servicemark is prohibited.

Securities offered through MetLife Securities, Inc., a broker/dealer (member FINRA/SIPC). 1095 Avenue of the Americas 10036. Metropolitan Life Insurance Company and MetLife Securities, Inc. are MetLife companies.

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