Saving for college in today's economy

February 2, 2009 12:00:00 AM PST
You have kids but you haven't started saving for their college education. Or you have, but with market conditions, you're wondering if you should continue. Rene Kim, senior vice president of solution services product management for Charles Schwab & Co., helps explain the options you have.

Rene Kim's advice:

Don't raid your retirement savings to fund your children's college education. You can find other ways to pay for college, such as loans, scholarships and financial aid. If you need money for retirement, on the other hand, you'll have a hard time convincing a bank to give you a retirement loan.

5 questions on College Savings and 529 Plans

Q: What is a 529 Plan?

A: A 529 plan is a state-sponsored program that allows parents, relatives and friends to invest for a child's college education.

Q: What makes it different from a regular savings account?

A: Generally, you can choose from a selection of age-based or static investment portfolios that are professionally managed by the program's fund manager. The account belongs to you, not your child, and any potential earnings grow tax-deferred. What's more, you pay no federal taxes on earnings as long as you withdraw the money to pay for qualified educational expenses.

Q: Are there limits to what you can contribute?

A: 529 plans don't limit how much you can contribute per year. Instead, they have a lifetime contribution limit (often greater than $200,000) per beneficiary that varies by state.

Q: In today's economic environment, does it still make sense to invest in a 529?

A: Even in today's economic climate and if parents have waited to save until college is a few years away, Schwab advises parents to remember that saving late is better than not saving at all.

Q: What do parents need to know to begin to save?

A: Here are a few quick tips for what parents can do to begin to save at various stages of their child's life:

18 years before college:

-- Open the account of your choice and contribute money every month, perhaps by signing up for an automatic investment plan. Contribute extra money whenever possible.

8 to 10 years before college

--If you haven't yet opened an account, do so right away. You may want to go with a 529 plan, which allows much larger lump sum contributions and may give you a chance to make up for lost time

1 to 2 years before college

1. Figure out your expected family contribution (EFC Calculator , a number that financial aid officers use to help evaluate your child's eligibility for financial aid.

2. Look into your options for financial aid and scholarships.

3. Reassess the risk level in your accounts. As college approaches, consider moving the money into less risky investments, such as shorter-term bonds and money market funds

About Rene L. Kim:
Senior Vice President, Solution Services Product Management
Charles Schwab & Co., Inc.:

René Kim is responsible for the retirement, education, and core brokerage products and services that Schwab offers its seven million account holders. In addition, she heads the Schwab Bank Deposit products group and is a member of Schwab Bank's management committee. Kim started her tenure at Schwab in April 1999 as head of retail core product management and marketing. With almost 20 years of experience in financial services, Kim began her career in consumer banking. She has worked in almost all aspects of retail banking and marketing, ranging from branch work, to incentive programs, to new product development. She also spent five years managing product development and marketing for small business banking products. Her educational background includes Bachelor degrees in both English and Italian and a Master of Business Administration degree from the University of California at Davis. Charles Schwab & Co., Inc. (member SIPC is a subsidiary of The Charles Schwab Corporation.

For more of Michael Finney's consumer stories and advice, visit 7 On Your Side.