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The Path to College

Better tax breaks and loan terms mean strapped families can still pay their way.

What to do: If Staffords don't cover the bill, next consider the government's PLUS Loan Program. PLUS loans allow you to borrow for the full cost of a dependent child's college education minus any financial aid. For the 2009-10 school year the interest rate is 7.9 percent for loans that come directly from the government, and 8.5 percent for those in which a financial institution is the intermediary. The fees run from 3 percent to 4 percent of the loan.

Leave private loans for last. Before the credit crunch, you could cosign a private student loan with a credit score as low as 620. Now, says Kantrowitz, banks require scores of 680 to 700—or even 730. (Get your score at myfico.com or equifax.com for about $16.)

The Obstacle: "My kids are a couple of years from college, and our 529 savings took a huge hit. Should I bet on stocks to get us back on track?"

What to do: The temptation is understandable, but please don't load up on stocks in hopes that a market rally will restore your accounts. There's no need to abandon stocks, says Kalman Chany, author of Paying for College Without Going Broke (Princeton Review, 2008), but overreliance on them would pose a hazard. "You simply can't afford to lose money when tuition bills are due so soon," he says.

Makes sense. And yet some parents of teenagers got a rude awakening last fall, when they discovered that the age-based portfolios in their 529 plans were invested more heavily in stocks than they'd realized. Though most age-based plans invest more conservatively as the child gets older, some keep as much as 60 percent of deposits in stocks even when the student is a year or so from college, says Joseph Hurley, founder of Savingforcollege.com.

Parents and grandparents looking for safer alternatives should consider more-conservative cash and fixed-income options within their plan. The IRS has just made this easier to do. You can change the investments in your 529 twice this year, which is twice as often as before. It's a rule change the IRS may extend into future years.

If your current plan lacks enough safe investments, consider rolling over your assets into another state's plan that offers more choices. Insurance-backed "guaranteed" options, for example, are available in seven of the state plans managed by TIAA-CREF. (Returns for 2008 were as high as 4 percent.) But before you do, review your tax situation. You may lose a lucrative tax break if your state allows a 529 deduction. Worse, warns Hurley, if you got a break for contributing to your original account, some states will require a payment if you change plans.

Will any of this restore your investment losses? Only slowly. But time and caution should restore your confidence in investing and spur you to keep on saving.

Walecia Konrad is a freelance writer specializing in finance, and a frequent contributor to AARP The Magazine.

 

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