Johns Hopkins Magazine -- September 1998
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T U I T I O N    S P E C I A L    R E P O R T

Saving for College:
Advice from the Experts

We asked several financial planning experts for advice on how best to save for college.

  • Invest aggressively in the early years, and gradually change to a more conservative plan as college years approach, says Steve Norwitz, a vice president at T. Rowe Price Associates, in Baltimore. According to one strategy, a couple could establish a portfolio consisting of 100 percent stocks when their child is born, shift to 80 percent stocks and 20 percent bonds when the child is part way through elementary school. About the time the child enters high school, Norwitz suggests, shift again to 40 percent stocks, 40 percent bonds, and 20 percent cash (25 percent stocks, 40 percent bonds, and 35 percent cash for more moderate investors). Finally, a year or two before college, transfer investments to 100 percent short-term bonds or cash.

  • Don't dig into your retirement savings to pay for college. Parents who are 59 1/2 or older when their children enter college can withdraw from a Roth IRA without penalty. But parents who dig into retirement funding to pay for college should be sure they'll have enough left over to support their retirement, cautions Raymond Loewe, of the New Jersey-based College Money.

  • Take advantage of several new tax laws and savings plans
    Education IRA: Parents or other relatives or friends can deposit a maximum of $500 per year per child in this new account. The earnings are tax-free, but an account receiving maximum deposits over 18 years will grow to only $25,000, only a fraction of total college costs. "The Education IRA is definitely worth doing," says Steve Norwitz. "But it's not going to make a big dent in your problem."

    Penalty-free IRA: Parents can now withdraw money from an IRA for college expenses without paying a 10 percent penalty for early withdrawals (although earnings are taxed).

    UGMAs and UTMAs: The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) enable parents, grandparents, or other adults to save money in a child's name. The advantage is that for children under 14, the first $700 of the child's earnings is tax-free and the next $700 is taxed at the child's rate (usually 15 percent). Once a child reaches 14, this "kiddie tax" rate generally applies.
       A cautionary note for parents: Once children reach the age of majority (18 in some states), they can withdraw UGMA and UTMA funds and use them as they please--paying for a Corvette, perhaps, instead of college.

    Hope Scholarship and Lifetime Learning Credit: Applies to single parents earning a maximum of $50,000 and couples earning a maximum of $100,000. These families can receive a tax credit equivalent to $1,500 per year for each of the first two years their children are in college, and $1,000 thereafter.

    Prepaid tuition plans: Maryland and several other states now have these plans, which allow parents and other people to buy shares that earn interest and are then redeemable for tuition at eligible colleges within the state. The shares are purchased at a discount.