Student Loan Dodgers

How early is too early to start planning for college? Some financial advisors say that it’s never too early. For parents and parents-to-be who are savers, the only thing you’ll need to take advantage of the tax-deferred college savings plans is the baby!

Federal law requires that all beneficiaries have a birth date and a social security number. If you’re anxious to get started before the baby arrives, you’ll have to make due with plain old, taxable savings accounts. You could also buy savings bonds or treasury securities. While they’re not tax-free, they do have tax advantages of their own.

If you’re not familiar with 529 plans, their name refers to the section of the IRS code that describes them. They’re basically tax-deferred savings accounts that are set up to benefit a particular individual. An individual can be named the beneficiary of multiple accounts.

Most states have elected to set up 529 plans, but there’s no requirement that you participate in your own state’s savings plan. Participating in your state’s plan may offer you additional tax benefits that you will not get if you participate in a different state’s plan.

Pre-paid tuition plans offer another option. Thirteen states offer a pre-paid tuition contract, where parents can purchase a defined number of semesters of college tuition. The tuition contract can be paid at once or over a period of years. Once the contract is paid off, the beneficiary will have the contracted number of semesters paid for as long as s/he attends one of the schools covered by the plan.

In addition to the thirteen state plans, parents can also fund an “independent 529″ plan, that enables their children to attend one of 270 participating private universities or colleges on a pre-paid tuition contract. One caveat with the Independent 529 plan: the contributions for an independent 529 plan may not cover the full cost of attending one of the participating universities.

One thing is certain, however. Saving for college is much easier when time is on your side. The earlier parents start planning for college, the more likely they are to amass the money their children need to attend a university.

As the old saying goes: “Experience is a tough teacher. She gives the test first and teaches the lesson after.” That’s true in most cases, but when you’re trying to learn how to pick investments for a mutual fund, the lessons can be particularly hard. In a clear-cut case of “learning by doing,” University of Maryland business students pick investments for a fund containing $1.2 million of the University’s money. At the end of the fiscal year, they compare their performances to those of experts in investment. This year’s results? Not great, but not too bad, either considering the economy.

Students admit that they pick their share of stinkers: Fannie Mae, which declared a $2.2 billion quarterly loss, was among the duds, as were shares of Citigroup, Wachovia, and E-Trade Financial. In all, however, the students’ picks put them 0.57% ahead of where they started out, compared to indices like the Standard and Poor’s 500.

The student managers have to get unanimous consent from their fellow managers to purchase stocks or other investments for the fund. That requires extensive research on the part of the proposer, much discussion and perhaps a little politics. Many universities are turning to these tools to help their business students understand the process behind buying stocks, managing portfolios and learning to recognize winners and losers.

Is there a lesson for non-business students who are looking to benefit from stocks, mutual funds and other investments? Yes. Do your research! If you have money to invest – many mutual funds have very low initial investments – you can begin a savings and investing plan. Mutual funds are good choices for students who are new to investing and may not clearly understand the risks and rewards.

With a mutual fund, the individual investor doesn’t have a lot of control over the performance of the fund because fund managers make all investment decisions. Different fund products are designed to produce different results. Individual investors can find high-risk/high-reward funds that fluctuate substantially based on market conditions. While the prospects for reward are higher, so is the risk of losing money. Other mutual funds strive for low-risk and accept lower rewards. These funds are good for achieving long-term savings goals or for preserving capital that’s already accumulated. Still other funds take a contrarian approach: investing in stocks might have significant return potential, but are low-cost at the time of purchase because they have not yet begun to appreciate in value.

Mutual fund investing doesn’t take a lot of money. You can start a small savings plan for yourself even with limited funds. Gains on mutual funds can be classified as “ordinary income” if the stocks in the fund pay dividends. You’ll get the paperwork from your mutual fund company before you file your taxes each year. Gains are also subject to capital gains tax when you sell shares of the fund. Filing for capital gains taxes means that you won’t be filing the 1040-EZ form, but you may find that the habit of savings and investing is worth the extra paperwork.

If you’re looking for financial aid, you know that the best kind of aid is that which you don’t have to pay back. Scholarships and grants abound, but you need to be able to find them and complete the application requirements.

Scholarship hunting can be a great sport for a college student. If you spend some time at it, you’ll soon develop an understanding of how to get aid and where to look. NextStudent offers a great free resource for finding scholarships. The NextStudent Scholarship Search Engine lists about 70,000 aid sources that generate nearly 6 million scholarships each year, valued at more than $16 billion. (That’s an average of more than $2,700 per awardee.)

I wouldn’t turn down $2,700 if someone offered it and neither should you. The search engine is designed to be easy. To start, you enter your personal and academic information into the search engine and the search engine does the heavy lifting for you. It returns a list of scholarships that match your academic and personal profile, and also provides eligibility information, application deadlines, the number of awards available, the amount of each award and contact information for the funding source.

If you plan to take up scholarship hunting, you can develop some very useful habits that will help you succeed in finding free money.

Be persistent. Take time to learn how scholarship search tools work to get the best search results.

Don’t limit your searches to specific majors, areas or other search criteria. Keep all of your options open when you’re searching. Your search tool will tell you whether you’re eligible to apply for a particular scholarship.

Keep your eyes open for smaller awards made by local groups. Banks, credit unions, community and civic organizations often have scholarship programs. Often, these scholarships are not listed in search engines and may be overlooked. Check the local section of your newspaper, or ask your family or friends to keep their eyes open for opportunities.

If you’re considering going to college - for the first, second or third time - it makes sense to spend a bit of time thinking and planning before you commit to going to school in a particular location.

Keep in mind that staying close to home will always be the least expensive route. Your tax dollars (and those of your parents) have funded the state universities, colleges and community colleges around you. As a state resident, your tuition rate will be less expensive, and that will make a big difference when you’ve graduated and it comes time to pay off your student loans.

Keep in mind that Federal loans can’t be used to cover living expenses, so carefully consider the colleges that are near your home. You may overlook these institutions because they’re “familiar” to you, but staying in your own back yard may be one of the best financial moves you can make. Commuting will also save you a bundle because it reduces your costs to tuition, fees, books and transportation.

Look carefully at the “scholarship” packages you’re offered. If an institution will cost $50,000 per year to attend, and you’re offered a 50% scholarship, you’ll need to determine whether or not you can really afford the remaining $25,000 bill. $25,000 is a big chunk of change, but if you don’t have it, and can’t pay back $100,000 after college, you’re better off looking at lower-cost schools.

Look carefully at your major. If you can only reasonably expect to make $30,000 right out of college, borrowing $100,000 isn’t really in your best interest. Get realistic about what you will be making after college. The Bureau of Labor Statistics can give you an idea of what people currently working in your field are making, but keep in mind that the statistics are an average of all persons in the field. Starting salaries are going to be lower, and may even be below average.

A standard part of your plan to pay for college should include scholarships. Some scholarships are need-based, which means that you’ll need to meet certain income guidelines to qualify. Other scholarships are academic, which means that you’ll need to maintain a certain grade-point level to be or remain eligible for them. A third kind of scholarship requires neither income- or academic eligibility, and may be based on social factors, such as belonging to a certain group, winning a contest, etc.

You may or may not be able to do anything about need-based scholarships. Either you qualify or you don’t. If you do qualify, however, take advantage of the opportunity to apply for as many need-based scholarships as you can. The process of finding and applying for these scholarships can be time consuming, but it may reduce your after-college debts substantially. It could also mean that you can afford to take a lower-paying job in a field you find more rewarding.

Academic based scholarships are those over which you will have the most control. If you maintain a good grade-point average and work hard to achieve the best possible grades, you’ll find that you open up a number of scholarship opportunities. A good strategy to maintain your grade point average involves taking a mix of difficult and not-so-difficult classes. You may find that your not-so-difficult classes return highly valuable experiences that you may have missed out on otherwise.

While you should spend most of your time in college concentrating on your studies, don’t forget to participate in other activities that will enhance your college experience. In addition to providing enrichment, these activities will “balance your portfolio” and present a well-rounded image of you on scholarship applications. These enrichment activities could be campus-based or non-campus based; political; community-service oriented; charitable; related or unrelated to your major field of study. Regardless, you should plan to take some time out for yourself to help maintain a balance in your life.