Suze Orman is an Emmy
Award–winning TV host,
New York Times best-selling
author and motivational
speaker. She can be contacted
Orman will answer selected
questions in this column.
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Q&A with Suze Orman
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Q We diligently contributed to our children’s
Coverdell accounts [a trust or custodial
account designed to help families pay for edu-cation]. Due to unforeseen circumstances, an
account for our son will have almost $;;,;;;
left when he finishes trade school. Our investment representative said we can’t roll it into a
Roth IRA or transfer it to our daughter. If it’s
not used for educational expenses by the time
our son turns 30, it will need to be closed and
we’ll get taxed on the gains.
Are there other options for that money? We
thought we were planning well to help our children, but now we seem to be getting penalized
because it won’t all be used.
—Jennie B., Turlock, California
A You may have already done this, but just to be
sure, please double-check with the trade school
to see if it participates in aid programs run by
the U.S. Department of Education. You can use
a Coverdell at vocational schools that participate
in the loan programs.
Assuming that’s a no go, I want to clarify one
thing about your daughter’s situation: If she is
under 30 and has education expenses, she can
in fact become the beneficiary of your son’s
Coverdell and use the funds for quali;ed education expenses. This is all spelled out in IRS
Publication ;;;: Tax Benefits for Education.
You can also change the bene;ciary to other
family members, such as grandchildren, nieces
or nephews. Just something to consider.
But if your daughter is not in school and you
want to use the money, you are correct that you
will have a tax bill. There is a ;; percent penalty
tax for not using the Coverdell for education
expenses, and you will also owe income tax
on any investment gains. Read that last
part carefully. You don’t owe tax on any
money you contributed to the account;
it’s only your earnings that are taxed.
Q I have a son in his second year
of college. I was able to pay for
his ;rst year and part of his
second year with a ;;; college
savings plan, but now I’m not sure
about the best route to take to pay
for the remainder. My home mortgage will be paid o; in June ;;;8,
I have minimal credit debt and
I have about $8,;;; in savings.
My accountant suggested taking a home equity line of credit
(HELOC) to pay for college, but
I am thinking a student loan
would be a better option.
What are your suggestions? I know that
a HELOC would have a lower interest rate,
but I’m worried about taking one out. I have
an ;;-year-old daughter and I have to think
about college for her also.
—Jessica D., Staten Island, New York
A You are in no position to borrow a penny for
your son’s college costs. You tell me you have
credit card debt, and $8,;;; isn’t a su;cient
emergency savings cushion; I want everyone
to have eight months of living costs set aside in
an emergency savings fund. Then there’s what
you didn’t tell me: whether you are on track with
saving for retirement. I am guessing you may
not have your retirement security all sewn up.
So, why are you thinking of taking on more
debt to pay for college? It’s your kids. You will do
everything for them, for their future. But the
most unsel;sh thing you can do for your kids
right now is to stop pretending you can pay for
college. Focusing on building security for yourself—getting rid of the credit card debt, building
emergency and retirement savings—will allow
you to be independent throughout your later life.
That is the gift every adult child will cherish most.
Clear-eyed decisions about college spending
aren’t just about getting through four years. They
can reverberate through a family for decades.
I am asking you to think about everyone’s future,
and not borrow for college right now.
If your son has not used federal Sta;ord
loans (subsidized need-based loans) yet, you
and he should start down this path ASAP. Every
college student can apply for Stafford loans.
The school’s financial aid office can provide
some guidance on Sta;ord loans. You can also
learn more at studentaid.
Annual loan limits for
undergraduates who borrow
under the federal Stafford
loan program are $;,;;; for
freshman year, $6,;;; for
sophomore year and $;,;;;
in both the junior and senior
year. Those are responsible
sums to borrow; your son
should be able to pay o; the
debt within the standard ;;
years. Neither of you is to
apply for more money
through a private student
loan. Private student loans
can end up being very
expensive and don’t offer
the same repayment flexibility as federal loans. C
Handling the costs of higher education