September 2004  Email this  Print this
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SOLVED!
Do we Save for College or Retirement?
Married just four years, James and Janelle Williams will soon face college bills for their blended family, which includes two teenagers and two younger children. The Williamses, who live in Catonsville, Md., wonder how they can come up with money for their children's education while saving for their own retirement. In their thirties, they have about $50,000 in various IRAs and 401(k) plans. And James, a technical sergeant with the National Guard, will be entitled to a military pension. But the couple haven't saved a dime for college tuition or related expenses, even though daughter DeShanea, 16, will graduate from high school in two years. James considered taking out a $25,000 home-equity loan--at 6.5% interest--to invest in a college-savings plan for the four kids. But that would be too risky, says Bruce Harrington of MFS Investment Management, in Boston, because you can't count on earning a high enough return to make up for the cost of the loan.
Instead, Harrington suggests that the Williamses begin funding a 529 college-savings plan for DeShanea with the $300 a month they had planned to start setting aside. If they don't touch the money until her last two years of college, they'll potentially enjoy four years of appreciation. Plus, instead of tapping their retirement savings, the Williamses and DeShanea can take out loans if necessary. "There are no loans to fund your retirement," says Harrington, "but you can always borrow money to pay for tuition and other college expenses."
Tops for college borrowing by students is the Stafford loan program. Congress could enact new rules in the coming months but, as it stands now, Stafford loans carry an adjustable rate that is set annually and capped at 8.25%. This year's rate is an all-but-unbeatable 2.77%. Full-time students can borrow up to $17,125 over four years. Following graduation, they can use another subsidized program to consolidate their Staffords at a fixed rate.
After Stafford loans, the next-best deal is probably for parents to take out a home-equity line of credit. Usually pegged to the prime rate, interest rates on equity lines have been hovering at about 4% lately. If you itemize, you get to deduct the interest on loan amounts up to $100,000.
If you've already tapped your home equity or don't want to put your house at risk, look into a Parent Loan for Undergraduate Students (PLUS). As with Staffords, interest rates on PLUS loans adjust annually. They're capped at 9% and can later be consolidated at a fixed rate. This year's PLUS rate is 4.17%. If you're within required limits -- adjusted gross income of no more than $130,000 for a couple or $65,000 if you're single -- you can deduct up to $2,500 in interest (find out more about education loans at www.finaid.com).
To fill small gaps in college financing, you could turn to private loans, such as Sallie Mae's Signature loan for students and Nellie Mae's Excel loan for parents or students. Adjustable interest rates vary, depending on the borrower's credit record, but they're generally higher than rates on government-subsidized loans. Also, private loans can't be consolidated.
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