I am a current high school junior and have extremely limited savings. Due to my parents’ economic condition early in their marriage, they were not able to set aside much. The bottom line is that among two CD’s at 1.15%, a savings account at around 1%, and several E and EE bonds about 10 years old, we’re talking about $3,000 to my name. I currently hold a job that pays around $300 per month, all of which I put away into the savings account.
Now, my family is in a relatively stable financial condition, and I occasionally receive significant tuition support from my extended family who are VERY well-off.
At this point, should I open a 529? If not, what is the best route for me in this situation?
NotAnyoneYouKnow
October 9, 2011 at 3:58 pm
Mr. Bond:
There’s no magic trick to saving for school – your opportunities to “earn money quickly” for school are exactly the same as your opportunities to earn money quickly for any other purpose. High risk investments have the potential for high returns, lower risk investments provide for steady and conservative returns.
529 plans rely on market investments – over the last few years, they haven’t exactly been raking in the bucks. Some 529 plans are aggressive, some are less so – and the aggressive plans have their risks. Even the aggressive plans are usually designed to take a more conservative approach, once the student reaches college age – so if you’re one year out from college, you’re not looking at lot of time for your 529 balance to grow. By the same token, savings bonds aren’t going to be much assistance at this point – you have to hold them until maturity if you want to make any money that way.
There are advantages to the 529 – your extended family can contribute to it, and the withdrawals are tax-free, but then there are disadvantages, too – your financial aid eligibility will be impacted by the amount of 529 savings that you’ve set aside.
I think you already know the answer to this question – it’s pretty much exactly the same question as “Can anyone tell me the best way to turn $3000 into $100,000 in the next 18 months so that I can invest in a Subway franchise?” If you’d asked that question, I’d tell you “Buy lotto tickets and pray”, and I’m afraid the answer to your question is very similar.
Fortunately, you don’t need to be in the position to actually pay CASH for college. You and your parents will both be able to take advantage of the federal government’s VERY convenient educational lending programs – the Stafford loan for you, and the PLUS (Parents’ Loan for Undergraduate Students) loan for your parents. Both loans feature exceptional interest rates and convenient repayment terms.
You’ll be eligible for a Stafford – the annual borrowing limit is determined by your year in college. As a freshman, you’ll be eligible for a $5500 loan, which will increase to $6500 in your 2nd year, and $7500 in your third and fourth years of school. You are automatically “approved” – there are no questions about your income, your debts, or your credit record, and you won’t be asked for a cosigner. The loan is in your name, and your parents will only appear on the paperwork if you decide to list their address as a future contact.
Your Stafford repayment will start 6 months after you leave school, and you’ll have 10 years to repay the loan. You’ll also qualify for a temporary “deferment” of payments if you experience financial difficulty after graduation.
The PLUS loan does require a credit check, but the approval criteria is far more relaxed than it would be for any other type of loan. Again, the interest rate is low and your parents won’t have to start the payments until you’ve been out of school for 6 months. Unlike the Stafford, there are no pre-set limits to what your parents can borrow each year – the lender can lend an amount up to your “unmet financial aid need”. (The difference between what you have for school and what your school costs).
You’re not going to turn $3000 into $100,000 in the next year and a half, but you will have access to some great lending programs, courtesy of the US Department of Education. You may also qualify for other forms of financial aid – depending on the results of your financial aid analysis. Don’t forget scholarships, too!
Here’s a great booklet that explains the aid system in detail – “Funding Education Beyond High School: The Guide to Federal Student Aid”. http://studentaid.ed.gov/students/attachments/siteresources/FundingEduBeyondHighSchool_0910.pdf After you read this Department of Education booklet, you’ll know a lot more about how you’re going to afford it all.
Good luck!