The Costco Connection

SUZE ORMAN

Suze Orman is an Emmy Award–winning TV host,

New York Times best-selling author and motivational speaker. She can be contacted at suzeorman.com.

Orman will answer selected questions in this column.

She regrets that unpublished questions cannot be answered individually.

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S EA N LE E D AVI ES

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. ed.gov/sa.

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