This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Spending for College Can Be Nearly as Hard as Saving for It

NEW YORK (TheStreet) -- Let's see: Should I select one from Column A, one from B and one from C? Or should I take all from Column A?

In a sense, that's the dilemma faced by many families who have amassed significant college savings spread over several accounts. They may have ordinary taxable savings, plus one or more Section 529 plans and perhaps even a grandparents' trust.

So if you have eight semesters to pay for, the question is: Which funds to use when? It's even more complicated if each type of account has a different mix of stocks, bonds and cash. Your choices will depend to some extent on your best guess about factors you cannot control, such as the ups and downs of the stock market. But here are a few guidelines.

First, tax-favored accounts such as Section 529 plans must be used for higher education or you lose the tax exemption on investment gains. Graduate school counts, but if the child is not likely to go on to graduate school, the 529 plan should be used up sometime during the two or four undergraduate years. (Unless you'd consider transferring the balance to another student, but that's another matter.)

Second, potentially volatile holdings such as individual stocks should probably not be held until the student's junior or senior year, because you don't want to depend on a funding source that could plunge in value just as you need it. You'll worry less if you cash out of risky investments such as individual stocks and volatile mutual funds early on -- near the end of high school or in the first year or so of college.

So let's imagine you have a high school senior with college savings divided equally into four parts, each with enough to fund one year: cash, a 529 plan holding a target-date fund, an assortment of individual stocks and a few stock and bond mutual funds.

And let's assume today's market conditions: You're sitting atop fairly healthy gains for the past few years and have reason to hope for decent stock and bond gains this year without especially high risks.

With freshman-year payments due by the end of summer, it's time to start amassing cash. You already have enough cash for the first year, but that can provide a good safety net in case your other investments plunge. So this might be a good time to reduce your overall risk by selling some or all of the individual stocks. Yes, you'd give up potential gains the stocks could produce, but you'd still have the stock mutual funds, a less risky way to profit from a rising market.

For sophomore year, consider unloading the stock and bond mutual funds. By the summer before this second year, you'd really have only two to two-and-one-half years to raise cash for the rest of the college years, so you realistically cannot expect big gains on stock and bond funds.

If the markets plunge over the next year, you could tap the cash account for sophomore year and hope the markets recover before you need the mutual funds to pay for junior and senior year.

If that doesn't happen, stick with the plan and use either the cash or 529 plan for junior year, and whatever is left for senior year. It probably won't make much difference which fund is used when, because by this late date the target-date fund in the 529 will have shifted out of stocks and long-term bonds and into cash or very safe short-term bonds.

The underlying principle: On the verge of college, don't get greedy seeking big returns. Reduce risk, assemble cash ahead of time -- and improve your chances of sleeping well at night.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $123.25 0.00%
FB $83.30 0.00%
GOOG $548.34 0.00%
TSLA $185.00 0.00%
YHOO $45.10 0.00%

Markets

DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs