College Savers Stuck in Stocks as Market Falls

College Savers Stuck in Stocks as Market Falls

Here are some recent articles that pertain to government sponsored 529 plans and how they have been affected by the recent conditions in our economy.

http://online.wsj.com/article/SB122411598296738639.html

http://online.wsj.com/article/SB122532196647782053.html

http://www.forbes.com/intelligentinvesting/forbes/2008/1110/071.html

The following is my commentary regarding these articles:

Since the inception of 529 plans, I have warned my clients and anyone else who would listen about the potential "pitfalls" of relying on a government sponsored program. Why? Two reasons: 1) It's a product and not a strategy, and 2.) Given all the adversities the government has faced and is now currently facing, do you really feel comfortable relying on them to provide for your children's education?

What saddens me the most after reading these articles are the solutions my industry is giving the parents who are participating in these programs. "Hold off tapping the 529 until the child's later years in school...Don't worry the market will rebound...Reallocate to a more conservative portfolio. And my personal favorite, "Forgo you dream of being a doctor and become a nurse instead." While there is nothing wrong with becoming a nurse, how would you feel if you had to tell your OWN child whose lifelong dream was to become a doctor, attorney, accountant, engineer, etc? The so called experts are basically telling us as parents to ask our children to settle. I have very strong feelings about this that I will expand upon in a future post but for now, back to my point.

College tuitions are rising and becoming a major expense for most families. There are many financial vehicles available in the marketplace designed to help parents with college costs (i.e. 529 plans, pre-paid tuition programs, custodial accounts, etc.) But at the end of the day, these are products and better quality questions need to be asked regarding these vehicles. Questions like, "What if I became disabled, or died, or sued?" "How do these vehicles impact the ability to qualify for financial aid or what if my child got a scholarship? "What if I'm unemployed or downsized? "What if the market continues on this volatile course?" Hopefully you get the idea. Know on to my main point I'd like to address.

Say you have two children with projected college costs of $250,000 and you will be 48 when these costs come due. These expenses represent a lost opportunity for you to build additional wealth for retirement. (For more information on lost opportunity cost, review my earlier posts or Google it.) In a traditional approach to college funding, the college costs cannot be recaptured or minimized since there is no strategy to recover these costs.

Few people as (well as financial professionals) understand the lost opportunity cost of college funding because they are so focused on the admirable need or goal of their children's education. They tend to ignore the efficient and effective use of their hard earned money.

One of the keys to sound college funding planning is not to relinquish all of your assets in order to fund your children's college education costs. Instead, and efficient and effective strategy is to simultaneously take advantage of every possible aid program, tax assistance, leverage, and cash flow strategy available to fund college education costs that allow you not to lose your own wealth building potential.

A well-designed college funding strategy should be designed to provide the benefits you want (i.e. a college education) whether you live, die, become disabled, get sued, acquire financial aid, market performs or under performs, or need to recapture lost opportunities to build additional retirement income. A true financial professional should be able to show you these coordinated strategies and review them with you in order for you to determine if this approach is an appropriate alternative for you specific situation.

Brian Eyster
(To contact Brian or to subscribe to one of his educational newsletters, please email brian@essentialstrategies.net)