Dear Liz: I have twin boys and have been looking for a college fund to set up for them. Most bank saving accounts don’t pay much interest. The only thing I have found that is halfway decent is a certificate of deposit. My grandmother set up a trust for me, but I don’t know whether that’s a good idea these days. Do you have any ideas that would help?
Answer: You’re actually asking two questions. The first is what vehicle to use for college savings, and the second is how to get a decent return on your money.
Let’s take the latter question first. Bank savings accounts or certificates of deposit are fine if your kids are headed off to college in a year or two, but these low-risk investments won’t give you much growth on your money. In fact, you’ll almost certainly lose buying power over time when you consider inflation. If your money is in a taxable account, you’ll lose that much more.
Many parents opt to take more risk in order to accumulate more funds. If college is 10 years or more in the future, investing at least some of the money in stocks or stock funds makes sense.
The vehicle you use is also important. If you expect to get financial aid, you’d be better off avoiding custodial accounts such as Uniform Transfers to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) accounts. These were popular accounts years ago when tax rates were higher, but they count heavily against you in financial aid formulas.
Many families find 529 college savings plans to be the best choice. These state-run accounts allow your contributions to grow tax-free for college and are treated favorably in financial aid calculations. These plans typically offer a choice of investment options, including age-weighted options that start out more heavily invested in stocks but that ratchet back exposure to risk as college draws closer. For more information, visit SavingForCollege.com.
Man wants wife to cosign loan
Dear Liz: I am a divorced 49-year-old man who has a lot of debt. I recently (and shamefully) turned in the keys on my ridiculously upside-down home in Arizona. My credit scores have plummeted and all my credit cards have raised their rates to 28% and above.
I am remarried to a wonderful woman who is more fiscally responsible and wants to buy a home. I’d like a quick fix, but that seems unlikely. I’ve avoided commingling our assets and credit so far, but recently I asked my wife to cosign a personal loan to consolidate my debt. I’ve also requested to be an authorized user on some of her high-limit, low-balance credit cards.
I fear this may be a break point for our relationship. She has worked hard to be responsible and I -- well, I have not. My strategy seems sound. What do you think?
Answer: Your plan could dramatically lower your interest costs, allowing you to repay your debt more quickly. It also could help rehabilitate your battered credit scores.
But the cosigned loan would put your new wife’s credit in your hands. If you missed a single payment, her hard-won credit scores could plunge overnight. If you failed to pay the debt, she would be responsible for it.
That’s a huge risk for her to take, so you shouldn’t hold it against her if she declines. Adding you as an authorized user of her cards involves much less risk, since she wouldn’t have to actually give you access to those cards, but she’s under no obligation to do that either.
If she turns you down, you might want to consider a visit with a legitimate credit counselor (one affiliated with the National Foundation for Credit Counseling) as well as a session with a bankruptcy attorney so you can be apprised of all your options regarding your debt.
New bank starts charging fees
Dear Liz: My online savings account has been taken over by another bank, which started charging a fee to transfer funds to external accounts. I feel like my savings are trapped and I want to move them.
But if I try to transfer the money to another bank, will I have to pay the fee?
Answer: Perhaps yes, but a one-time fee is better than being nickel-and-dimed to death.
One of the big advantages to online savings accounts -- besides better interest rates -- has been the freedom to save and move your money around without paying onerous fees. It’s unfortunate your new bank has changed the rules, but you’ll find plenty of competitors that will be delighted to accept your money without charging account or transfer fees.
Consider chatting up one of the bank’s phone representatives or branch tellers to see whether there’s a way to get your money out for free. If not, pay the transfer fee and consider it a small price to get free.
Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at www.asklizweston.com. Distributed by No More Red Inc.