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Reducing the College Cost Burden
There is no end in sight for the continually increasing
cost of college. Four-year costs at some 4-year
private institutions are exceeding $190,000. However,
there is good news. The amount of financial aid that
is available is at a record high and available to more
families than ever before. This support, which comes
in the form of tuition discounts, is not just reserved
to families at the lowest income levels. As an
example, for a family of five with two in college and
an income of over $200,000 may be eligible for as
much as $15,000 in need-based aid-per child for
each year of college. This may come in the form of
low-interest loans or scholarships.
As families save and prepare to pay for college, they
should consider financial aid in their investment
strategy. The free money that may become available
from the government or colleges can outweigh by
several times over earnings from investments and tax
reduction or deferment benefits of some education
investment strategies.
Here's one example:
A family in the 25% tax bracket decides to gift
$30,000 in stock (stock basis of $20,000) to their
child for college costs. The logic behind this strategy
is to shift the income from the sale of the stock to
the child so that it will be taxed at the lower tax rate
of the child (10%). As a result of this strategy, the
family will save $1,500 on taxes.
However, in the financial aid formulas, a child's asset
is considered as available to pay for college at seven
times that of the parents (35% vs. 5%). This means
for the first year of college an additional $9,000 will
be expected of the family as a result of the
adjustment. This $9,000 may be available in free
money.
In addition to the looking at the owner of the
asset and income stream, the formulas and specific
colleges assign different values to the wide variety of
elements in your portfolio.
What Should You Do?
- Regardless of the age of your children, you
should start by determining whether or not you might
be eligible for aid. Unless you expect your income and
assets to increase at greater than twice the rate of
inflation (rate of college cost increases), you can
anticipate that your financial aid situation will stay
the same. There are online calculators available to
determine eligibility. Campus Bound also provides free
eligibility consultations if you would like help with this
process.
- Once you have determined your eligibility,
you can begin to plan your investment strategy
accordingly.
- For families that are eligible or close to
eligible, you should apply for aid in January of the
student's senior year of high school. Colleges are
using financial aid to entice desirable students and
you may be pleasantly surprised. The cost to apply is
nominal (or potentially free) and the potential savings
is significant.
Find out more about Campus Bound....
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Greetings!
We hope that you enjoyed your 4th of July
activities with family and friends! We had prime seats
for Duxbury's 112th annual 4th of July parade
complete with floats, flying candy and politicians.
June and early July have been very
busy for us here. Bill was interviewed by the
Boston Herald for the article Fed's rate hike
means work for consumers. He also had an
article entitled Is a real estate
individual retirement account right for you?
published in the June 14th edition of Mass High
Tech. Paula had an article entitled
Ladies -
Take Charge of your Financial Future!
published on the Downtown Women's Club
website. Click on any of the titles to read
the articles, if you haven't already read them.
Summer is finally in full swing, take some time to
enjoy!
Time to Share. Create a Buzz. This month's
feature article is written by Gregg Cohen, founder
and President of Campus Bound of Quincy, MA, an
innovative service that is a leader in providing college
admissions and financial aid support. Campus Bound
offers personalized guidance on maximizing your
financial aid package, assistance completing college
and financial aid applications, and helps to ease the
conflict and confusion that frequently arise during
this increasingly complex process. For more
information on Campus Bound call Gregg at
617.769.0400, info@campusbound.com or visit
www.campusbound.com.
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| Keeping a Long-Term Perspective |
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According to a recent survey, many older workers
have decided to delay retirement until they reach
their 70s - or even 80s - largely because of
retirement plan losses. In the past year, one-fourth
of workers aged 45 and older have changed the age
at which they plan to retire. And most of them did so
for economic reasons.
As stock prices improve, the natural temptation is
to "make up for lost time" and consider adding a few
more stock-related investments to your portfolio. A
year or two of big returns, you might think, could put
your portfolio back on track. But reacting to market
moves - rather than relying on a long-term,
diversified strategy - can expose your portfolio to
unnecessary risks.
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| Growth in the Economy Near You |
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As a whole, the U.S. economy is growing at a
favorable rate. The latest figures show gross
domestic product growing at nearly a 4% annual rate
in 2004. That's positive news, but it may not be the
whole story.
Most people are affected more by what's happening
in their state or region than by what's happening on a
national level. For example, the national
unemployment rate gets lots of attention, but it may
not reflect conditions in your area. In May, the U.S.
unemployment rate was 5.6%, but it was 6.2% in
California, 3% in Hawaii, and 5.8% in New York. The
U.S. economy is a collection of many smaller
economies with unique characteristics and conditions
that are not visible when looking at the national
picture. When tracking the economy for personal or
investment decisions, here are some sources for
economic conditions close to home.
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| Bonds and Short-Term Interest Rates |
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In recent years, interest rates have hovered near 40-
year lows, easing the burden on borrowers and
creating a flurry of activity in the refinancing
industry. Because inflation has also remained low, the
Federal Reserve has been able to maintain its
accommodative stance toward the economy and
keep target interest rates at bay.
But as the economy improves, many people believe
that short-term interest rates will soon be on the
rise. If this is the case, fixed-income investors may
want to develop an investment plan that takes
advantage of fluctuating yields.
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| 529 Plans Offer an Attractive Combination |
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At the end of 2003, Section 529 plans held an
estimated $32 billion in assets. In five years, if
current trends hold, they are expected to increase by
more than 400 percent in deposited assets.
What's behind this surge in popularity?
These college savings plans offer many benefits,
including the combination of potential tax-deferred
growth and federal tax-free withdrawals for qualified
higher-education expenses. Also, 529 plans have no
income limitations or age restrictions, and donors can
give up to $11,000 per year ($22,000 for couples)
without incurring gift tax penalties.
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| Countdown to Retirement |
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According to a recent survey, three out of four U.S.
workers are able to make pre-tax contributions to an
employer-sponsored retirement savings plan. And half
of workers have accumulated other savings or
investments in addition to retirement assets.
It's not uncommon for retirees to have income from
multiple sources. The order in which these assets are
accessed for retirement income is important. It can
influence your tax burden and potential returns
throughout your retirement years.
When your last day of work is over, will you know
which assets to tap first to help make sure that your
money lasts as long as possible?
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| Preservation Principles |
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Although Social Security is the largest source of
income for many retirees, annual benefits may trigger
a higher tax liability for those who have other
significant sources of retirement income.
Since 1984, Social Security beneficiaries with income
exceeding certain levels have been taxed on a
portion of their benefits. Today, the calculations for
determining the taxability of Social Security benefits
are complex and are based on a two-tiered system,
under which either 50 percent or 85 percent of
benefits may be taxable. This can pose a tax problem
when income from other sources (including pensions,
taxable investment income, and retirement plan
distributions) puts a retiree's income over the income
thresholds ($32,000 or $44,000 for married couples,
$25,000 or $34,000 for single filers).
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