Paying for College in a Recession: Schwab Offers Short Term Solutions and Long Term Strategies

Monday, April 13, 2009 5:55 am PDT

Dateline:

SAN FRANCISCO

Public Company Information:

NASDAQ:
SCHW

SAN FRANCISCO--(BUSINESS WIRE)--With a struggling economy and tuitions expected to reach $200,000 in the next two years, the majority of families are searching for ways to cover college expenses. Whether enrollment is in the fall or 18 years from now, Charles Schwab & Co., Inc. has the resources to help parents make ends meet without raiding their retirement accounts.

“Students are receiving acceptance letters and parents are wondering how to manage tuition payments in this economic environment,” said Rene Kim, senior vice president at Schwab. “It is important that parents don’t automatically turn to retirement savings to fund their children’s college education; there are other options.”

Paying and Saving for College in the Short Term

If college is just around the corner, saving late is better than not saving at all. As college costs are spread across at least the duration of attendance, there is still an opportunity to invest for college using vehicles with a shorter time horizon.

It is important to figure out the expected family contribution, a number that financial aid officers use to help evaluate a child's eligibility for financial aid, as well as research your options for financial aid and scholarships. Parents should also reassess the risk level in their accounts and, as college approaches, consider moving the money into less risky investments. For parents who haven’t reviewed their portfolio in a while, this is an excellent time to reconnect with a financial consultant or start the process with a complimentary consultation.

College Saving Tools for the Long Term

For those with more time between now and the first tuition check, there is a portfolio of savings vehicles available. However, studies reveal that there is some confusion about the possibilities, particularly 529 plans – arguably the most effective method of saving in the long term. An earlier Schwab survey of Americans aged 25-40 found that only 32 percent considered themselves “familiar” with 529 plans.* Further, only 6 percent of those surveyed had an active account.

  • 529 Plans: A 529 plan is a state-sponsored program that allows parents, relatives and friends to invest for a child’s college education. Participants 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 the custodian, not the child, and any potential earnings grow tax-deferred. What’s more, there are no federal taxes on the money to pay for qualified educational expenses. 529 plans also don’t limit annual contributions. Instead, there is a lifetime contribution limit (often around $300,000) per beneficiary that varies by state. For further guidance, all clients at Schwab have access to a 529 college savings plan team that addresses questions, provides guidance on plans and how to compare plans across states.

    Though the Schwab 529 is sponsored by the state of Kansas, residents of any state can open an account with no enrollment or account service fees. Participants can invest in a professionally managed portfolio with a range of investment choices based on investment objective, risk tolerance and time horizon. The Schwab 529 Plan also has a higher contribution limit of $290,000 per beneficiary.
  • Education Savings Account (ESA): An ESA is managed by the custodian on behalf of the child. Contributions to an ESA are made in the form of cash, but they can be invested in a variety of instruments including stocks, bonds and mutual funds. When the child turns 18, no further contributions can be made, and there is the option of handing control of the account over to the child.

    ESAs provide tax advantages similar to 529 plans: Money grows tax-free and there are no taxes on earnings if money is withdrawn to pay for qualified educational expenses. However, ESAs can be used for certain elementary or secondary school expenses as well as for college expenses. If qualified, the maximum annual contribution is $2,000.
  • Custodial Accounts: A custodial account is an account managed by a parent or guardian on behalf of a child. The money belongs irrevocably to the child and can be used at his or her discretion upon reaching the appropriate age (18, 21 or 25 depending on the state rules governing the account).

    Custodial accounts offer minor tax advantages and have no restrictions on how the money can be spent, as long as it's for the benefit of the child. If looking for ways to set aside money for expenses that aren't covered by a 529 plan or ESA a custodial account may be just the thing.

Account Comparison Chart

    Schwab 529 Plan  

Education Savings
Account

  Custodial Account
Tax-deferred earnings on investments X X  
Tax-free withdrawals when used for qualified expenses1 X X  
High contribution maximum X   X
Significant amount of contributions excluded from gift tax X   X
Adult maintains ownership of the account X X  
Can change original beneficiary2 X X  
Professionally managed portfolios X    
No age limit for beneficiary X    
Minimal impact on financial aid   X   X    


1. Qualified education expenses can include tuition, fees, books, supplies, equipment, room, board. There are state and federal early withdrawal penalties if funds are not used for qualified expenses for 529 plans and Coverdell accounts types.

2. Beneficiaries for education savings accounts can be changed up to the age of 30.

* Charles Schwab conducted The Gen X Money Mindsets Study – it incorporates more than 2,000 online and face-to-face interviews nationally and an additional 3,000 interviews in America’s largest cities. This effort produced six unique profiles of Gen X attitudes and mindsets toward life and money – and toward understanding how those mindsets guide the group’s financial behaviors.

A segmentation study creates profiles of a population by using statistical analysis to define groups of individuals around certain characteristics.

Before investing, carefully consider the plan’s investment objectives, risks, charges and expenses. This information and more about the plans can be found in the Schwab 529 Guide and Participation Agreement available from Charles Schwab & Co., Inc., and should be read carefully before investing. You may request a Schwab 529 Guide and Participation Agreement by going to schwab.com/529. If you are not a Kansas taxpayer, consider before investing whether your or the beneficiary’s home state offers a 529 plan that provides its taxpayers with state tax and other benefits not available through this plan. As with any investment, it is possible to lose money by investing in this plan.

The Schwab 529 College Savings Plan is available through Charles Schwab & Co., Inc., and is managed by American Century Investment Management, Inc. The Plan was created by the Kansas State Legislature under the provisions of Section 529 of the Internal Revenue Code and is administered by Kansas State Treasurer Dennis McKinney. Notice: Accounts established under the Schwab 529 Plan and their earnings are neither insured nor guaranteed by the State of Kansas, the Kansas State Treasurer, American Century Investments or Charles Schwab & Co., Inc. Accounts established under the Schwab 529 Plan are domiciled at American Century Investments and not Schwab. American Century Investment Services, Inc., Distributor and Underwriter.

For More Information

Visit www.schwab.com/college to find college savings calculators and further details on the portfolio of college savings options available. As always, be sure to check with your financial advisor for specific guidance.

About Charles Schwab

The Charles Schwab Corporation (Nasdaq:SCHW) is a leading provider of financial services, with more than 300 offices and 7.4 million client brokerage accounts, 1.5 million corporate retirement plan participants, 475,000 banking accounts, and $1.0 trillion in client assets. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through its Advisor Services division. The Charles Schwab Bank (member FDIC) provides banking and mortgage services and products. More information is available at www.schwab.com. (0409-8305)

Contact:

Charles Schwab
Matt Hurwitz, 415-636-3700
Matt.hurwitz@schwab.com
or
Edelman
Jennifer McClellan, 212-704-4567
Jennifer.mcclellan@edelman.com

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