Expert Interview: Joseph Orsolini on Saving For Your Multiples’ College Education

J: In an ideal world, parents should start planning for college at birth or sooner! The reality of college savings is that only half of all families are saving for college. Of the families that are saving, 70% started before their child reached the age of five. At that age parents start to make lifestyle choices (schools, housing, etc) that make it difficult to add a college savings program into their budget.

L:What methods of saving do you recommend for families that are on an extremely tight budget?

J: On an extremely tight budget, the most import thing parents can do is fund their retirement. College savings is a compromise with retirement savings. If parents become proficient at saving for retirement; later (when they have a head start on retirement) they can shift their savings focus to college. There are many options for getting a college education but not so many options in retirement so it is important to get ahead with retirement savings.
One way to kill two birds with one stone is to fund a Roth IRA. While the Roth IRA funds are intended for retirement, the tax code allows you to pull funds out early without a 10% penalty if used to pay college expenses. The Roth IRA gives parents the flexibility to use the proceeds for retirement or college.

L:Can you explain how an education IRA works?

J: An education IRA, or Coverdell Education Savings Account (ESA) as they are now known, allows parents to put away up to $2k after-tax dollars into an account (typically a mutual fund) that builds up tax deferred. If the money is used to pay education expense (tuition, books, etc) the funds come out tax-free.

L: How is saving for multiples different than saving for children of different ages?

J: The advantage of multiples when it comes to college is that the children are much more likely to receive financial than children in families spread out with different ages. Because of the additional financial aid possibilities, you may not need to save as much as if your children are spaced years apart. But don’t use this as an excuse not to save!

L:What are the first steps that a family should take when coming up with a plan to save for their childrens’ educations?

J: Children start out small and so can their college fund. Begin saving an amount that you can comfortably afford and increasing that amount as time goes on. The key is to get used to living on less as you go along.

L: What are the benefits of an education IRA? Drawbacks?

J: The education IRA or Coverdell ESA is a great option to save for college (and the one I use for my children). It provides flexibility in that the proceeds can be used for not only for college but also grade school or high school expenses. Coverdell ESAs also have lower ongoing expenses as compared to a 529 because there is no sponsoring state to add in their expense.
The drawback is that you are limited to a $2k per year contribution. The ability to contribute to a Coverdell ESA begins to disappear for families with incomes over $190k . Another drawback is that the grade school/high school expense feature may disappear along with the maximum contribution dropping to $500 after 2010 as part of the expiring Bush tax cuts.

L: It has been suggested that 529 plans may actually be detrimental when saving for college because they can reduce the amount of financial aid a student receives. Is that true?

J: Back when they were first introduced that may have been the case at certain Elite colleges, but the current financial aid rules put them on equal footing with other assets in determining financial aid.
With multiples, 529 plans and Coverdell ESAs can actually increase your chances of receiving financial aid compared to other assets. If the accounts are held in UTMA or custodial accounts, the assets from one child will not count against another.

L: Are there special considerations given to families with multiples when being considered for financial aid?

J: Having multiples is beneficial when it comes to financial aid. Multiples are more likely to get aid than if your kids are spread out every couple of years.
The financial aid system calculates each family’s expected family contribution (or EFC) which represents what the family is expected at a minimum to pay towards college. This figure is compared to school’s cost of attendance to determine how much aid your child will receive. If more than one child is in college, that EFC figure stays the same but is divided between each child so multiples are more likely to get aid compared to a family with only one child in college.
I currently have a client with triplets in college and twins in high school. So at some point they will have 5 kids in college. The father is a well paid doctor but his children are getting significant aid.

L:How can parents go about opening a 529, education IRA, or prepaid college account?

J: These accounts can be purchased either directly by visiting the appropriate plan website or in many cases through an investment representative.
Opening an account is only the beginning. Careful coordination is needed when using the funds out to ensure that you are not jeopardizing your chances of financial aid or taking the various educational tax breaks. If you go direct, you are on your own to keep up with the ever changing rules of college planning and financial aid. If using an investment advisor be sure that they have more than a passing knowledge of college planning.

L: What advice would you give to parents of older multiples, who haven’t been able to put away much for education and only have a few years left to save?

J: Start saving something so you get used to living on less. College is like running a marathon. You can’t go out and run 26.2 miles the first time out. You have to build up gradually. Getting used to living on less now will help buffer the shock later when the college tuition bill comes.
Parents also need to set parameters of what they are willing to contribute to their children’s education. Let you children know how much you can afford to help with their college education before they fall in love with that expensive budget-busting college.

If your child is heading off to a state college this year, factoring in student loans and tax breaks, you are probably going to be writing a $1,000 per month check for the next four years. If parents had saved $100 per month from birth they would have college paid for… do you want to write a bunch of small checks as you go along or write BIG ones when they get to college?

L: Are there any other print or online resources that you would recommend for parents that want to learn more about this topic?

J: www.savingforcollege.com has a wealth of information on 529 plans and other qualified education plans. www.finaid.org is a fantastic resource on financial aid.