529 plans posts

The recession may be over, but many families are still feeling the effects. Unemployment is at a record 10.2% and wages are flat. The cost of gas is taking a bigger bite out of paychecks, and home foreclosures were one fifth of home sales in September.

To help, WalletPop is launching an occasional series in which your personal financial questions will get answered by our experts. Leave your questions in the comments section below.

Question: As a single, self-employed mother of two, I need to buy life insurance. How much should I buy?
--Laurie W., 51, psychologist

My first daughter won't be going to college for another 11 years, and I'm already feeling ill when I wonder how I'm going to pay for it. Not to mention my second daughter, who will be ready for college in 13 years.

So I'm always interested in learning about different ways to pay for college, and one such way that doesn't seem to be discussed that often is through college payment plans. These aren't loans but "pay as you go" plans.

It's kind of similar to the way you buy a house or a car. You make a payment every month for your kid's college education while they're in college. Given that tuition can run as high as $20,000 to $50,000 or more a year, nobody envisions payment plans as the only way you'd pay for college, but they can make up a shortfall, if you've exhausted your student loan possibilities and your 529 is as padded as possible and you have a student who has graduated from high school and rarin' to go.

I was told about payment plans by someone who works for Key Education Resources, a KeyCorp company, and naturally, the person was extremely enthusiastic. But then she works for this company, so I would expect that.

Parents put less money into college savings plans during the past year, according to new data released this week, perhaps learning the lesson that it's best to take care of yourself first before saving for your child's college expenses.

Assets in college savings plans were an estimated $85.9 billion in the first quarter of 2009, down from $108.7 billion a year ago, or a 21% drop, according to data developed by the Financial Research Corp. and released this week by the College Savings Foundation, or CSF.

And the numbers get worse. Gross sales, or new dollars invested in 529 accounts, fell 37% in the past year, from $2 billion in the first quarter of 2008 to $1.25 billion in the first quarter of this year.

"We're not surprised by that given the market conditions and these trying times," said Kevin McMullen, chairman of CSF, in a telephone interview.

Ask not what your bank can do for you; ask what your bank can do for your country's sullen consumers.

Next week, when Bank of America Corp. takes over the Upromise credit card from Citigroup Inc., it plans to eliminate a $300 annual limit on cash-back loyalty-rewards bonuses that Citigroup had imposed.

WSJ.com blog The Wallet reports on the Upromise promise. Until now, customers who spent $30,000 a year on the card maxed out their 1% annual cash-back limit. No longer.

Upromise is designed to help parents save for their kids' college. But beyond its educational goals, is the Upromise move an act of patriotism? After all, President Obama is pleading with increasingly nervous (and increasingly unemployed) Americans to please, please part with just a little loose change. The card's cash-back savings can be funneled straight into a Upromise-managed 529.

While spending $30,000 on a Upromise card isn't quite enough to buy a year's tuition at Harvard, it's enough to put you in Benjamins sufficient to acquire the stuff of your dreams (base price, 16GB 3G version). Spend 'em if you got 'em.

As college costs continue to soar, Americans who had been smart and fortunate enough to put aside money to cover college expenses have seen the value of that 529 Plan fall by $23.4 billion over the past year -- a decline of some 21%. This comes as college tuition prices rose another 5.6% over the last year, leaving families with a pretty big problem: less money to pay for something that is more expensive.

For precociously financially savvy families with young children, these declines aren't such a big deal -- annoying but there's enough time left that they don't have any immediate impact on college affordability. For families with high school students though, these declines can be a disaster -- especially when home equity is no longer available to tap into for college expenses, retirement portfolios are in the toilet, and that annual bonus isn't as good as it used to be.

Want to save for college, but not sure what type of account to use? State-sponsored 529 plans should definitely be your first choice. You don't have to pick one from your own state, but tax incentives might encourage you to do so. If your state doesn't off good tax incentives for colleges savings, then look for the plan with the lowest fees. Kiplinger's gives you an excellent overview of your options, as well as a state by state run down.

These state-sponsored plans can give you shelter from both federal and state income taxes, as well as give your child's grandparents a good way to chip in for their grandchild's education. In fact a grandparent can contribute up to $12,000 a year without having to worry about federal gift taxes (a couple can contribute up to $24,000 without gift taxes). If one grandchild decides not to go to college, just switch the account into the name of another child that wants to go. The money in the fund grows tax-deferred and as long as you only use it for qualified educational expenses you don't ever have to pay taxes on the gains.

You also don't have to worry about saving too much. The federal financial-aid formula assesses parent-owned accounts at 5.6%, while student savings can be assessed a whopping 20%. But, if you want to avoid taxes you must use the funds for qualified education expenses, so you don't want to save more than you think your child will need for college.

The choices can be daunting, so many people chose to work with a broker. But most states allow you to invest directly without going into a broker plan, so why pay someone a 5.75% commission when there are some excellent plans you buy directly from TIAA-CREF and Vanguard. Check out Kiplinger's state by state choices as well as its top five picks.