School "Daze"

It’s that time of year again—students are moving into the dorms at colleges and universities all over the country. Traffic is increasing, restaurants are crowded, and all the other “problems” associated with students starting a new school year are at the forefront. It’s a new world for freshmen students; confusing and sometimes stressful. That stress is not limited to students, however. Parents are looking at rising education costs and looking for ways to pay for college expense. A frequent source of that funding comes from college savings accounts (such as 529 plans) and from extended family (grandparents). Those sources are our topic of discussion here.


The 529 college savings plans are sponsored by states and the funds in those plans are managed by large mutual fund companies (Vanguard, Fidelity, American Funds, etc.). After tax contributions placed into the accounts grow tax free as long as the funds withdrawn are used to pay for qualified college expenses (room, board, tuition, mandatory fees, books and equipment, etc.). Historically, parents have been the ones setting up 529 plans for children; the owner of the account is the person setting up the plan. However, with rising college costs and more affluence in the retiring baby boom generation, grandparents are funding 529 plans. That’s a great benefit for easing the financial burden on parents of college students. It can come with some hidden implications that should be addressed.


College personnel award financial aid to students based on the income and assets that students and their parents claim on the students Free Application for Federal Student Aid (FAFSA) form. Contributions from parents are not counted as student income for FAFSA purposes. That is true even when the funds come from a 529 plan owned by the parent. However, when funds come from other people (such as 529 plans owned by grandparents), the funds are counted as student income. Therefore, payments from a grandparent owned 529 plans could jeopardize the student’s eligibility for other forms of financial aid. Limitations (or loss) of grants, subsidized federal loans (on which the student is not charged interest while still in school), or work study programs funded by the government or college might come into play. The loss of such benefits could be significant. Prudent planning dictates consideration of such a loss in the total cost of a student’s education.


Are there ways for grandparents to fund college expenses and still get the tax free growth on the funds? Perhaps. The grandparents could possibly transfer ownership of the 529 plan to the parents prior to any withdrawal for college expenses. Some plans don’t allow a transfer of ownership and may count the transfer as a distribution (earnings are then subject to taxes and a penalty because the distribution was not used for allowable college expense). Another possible alternative would be to wait until the student’s last year in school before using 529 funds. The student (not attending graduate school) would not be filing another FAFSA for the following year; hence no income considerations. Care should be taken here though as some colleges require additional information that requires listing all accounts benefiting the student which are owned by other than the parents.


While students are facing the academic world (many for the first time), planning for college expenses should be done in advance. We, at Paragon Financial Advisors, will be happy to review the plans our clients have put in place. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Investing Beyond Stocks and Bonds

When you think of “investing”, what comes to mind? Did you think of the US stock market? You might have thought about bonds or other fixed income securities. What about real estate, commodities or other alternative investments? Although less common, they can provide significant benefits when combined with stocks and bonds. How can these investments benefit you? The answer lies in their correlation, or relatedness to other investments. Alternative investments typically have lower correlations with stocks and bonds; they often “zig” when others “zag”. These alternative investments increase the overall diversification of the portfolio, thus reducing risk (i.e., think fewer eggs in a single investment basket). Below are some examples of alternative investments and the importance of their inclusion within a portfolio.

Commodities

Inflation, or the general rise in prices, typically reduces company profits due to an increase in costs (e.g., cost to borrow money, cost of input materials, and cost of transportation). Commodities typically increase in value when interest rates are steady or rising. They may provide the investor a way to benefit when stocks are not performing well. Gold, and other commodities, typically have very low and often negative correlations with stocks. Commodities can also provide significant income from the production and transportation of oil and gas.

Other Investments

Due to the finite and absolute necessity characteristics of real estate, investors can benefit in a number of ways. Investors seeking income may find Real Estate Investment Trusts attractive due to their high yields. Others may prefer investments that benefit from the long-term appreciation of property values. Foreign investments provide exposure to markets less correlated to the United States; other economies sometimes expand when the US economy contracts. Access to frontier and emerging markets allow investors to benefit from faster growing economies and increased consumption from an expanding middle class. Very small companies often provide niche services or goods, frequently sheltering them from adverse events that affect larger companies.

Commodities and other alternative investments reduce risk by increasing exposure to a diverse set of asset classes. They frequently outperform when US stocks and bonds fumble. Although they are typically a small portion of a portfolio, the benefits of inclusion may be significant. In a diversified portfolio, alternative investments should lessen the volatility of the entire portfolio. Despite the correlation benefits, investors must realize that the individual alternative investment may have greater risk than traditional investments.

Have you reviewed your alternative investments lately? We at Paragon Financial Advisors look beyond the realm of US stocks and bonds, seeking investment opportunities across the globe. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.