In the past, parents sometimes took out home equity loans or borrowed from retirement accounts to help finance postsecondary education for their children. These days, many families have limited or negative equity in their homes and may have already borrowed from retirement accounts to stave off foreclosure or pay unforeseen medical bills, leaving little left to pay for college. Woodstock is working on some interesting research to uncover the extent to which workers are withdrawing from retirement savings and we look forward to sharing that with you soon.
Even before my children were born, I started investing in Illinois college savings bonds. If bonds are purchased when the kids are young, they are not too expensive and grow in value as the child grows. Bond purchasers pick maturity dates to correspond with the years the child would be attending college. These bonds are fully guaranteed by the government and tax-exempt. Returns are small, but risk-free. Because bonds are low-yielding, they should not be the sole source of funding for college.
My son is fortunate that his parents also saved for his college education through the Illinois Bright Start 529 college savings plan. In addition, he benefited from education fund gifts from his grandfather. He also saved money he earned through summer jobs (one of the lucky teens to land a job this summer and last) and received some academic scholarships and grants.
Illinois stopped selling college bonds in 2002 and started counting them as assets in determining eligibility for financial aid in 2005. I don’t know why those decisions were made. With so much recent volatility in the financial markets and lack of consumer confidence, perhaps it is time to look again at offering safe and simple programs such as college savings bonds so that more of our children can have a chance to attend college.
As we are forced by necessity to rely less on home equity as a source of wealth due to the foreclosure and financial crisis, it is important to ensure that people of all income levels have access to a wide array of financial products to save and build wealth across the life cycle.