With news from Washington, we always hear about the hot buttons and often not about the details that really affect our lives. But as in annual reports, most of the meat is hidden in the footnotes. The new 11^th hour debt ceiling deal has some big surprises in it for student borrowers.

In case you missed the fine print, here’s the change. For graduate students, Stafford loan interest will no longer be waived while the student is in graduate school. Formerly, these loans did not charge interest on the principal until six months after the student graduated. As we all know, for graduate students that can take a verrrryyyy long time. Now, interest will accrue while the student is in school, and be added to payments when repayment begins. It can be thousands extra in costs for students who borrow the max. How much is this “tiny” change worth? Well, the estimate is that it will total $21.6 billion over the next two years, with the savings to be applied to maintain Pell Grants. These changes will go into effect on July 1, 2012.

Also gone is the credit for students who make on-time loan payments for 12 months. Now, all you get is a thank you—okay, probably not that either.

This change makes it even less desirable to have loans, and I still recommend borrowing as little as possible and certainly no more than what the student can expect to make in the first year out of school. The reason for this rule of thumb is that if the student is repaying with 10% of income (a reasonable figure) it will take 10 years to pay it off. As the student’s income increases, there’s some chance that a loan can be paid off early.

While I strongly believe that undergrad education should be all about acquiring a broad base of knowledge, students should keep a closer eye on career choices if they’re borrowing significantly. You don’t want $80,000 in loans as a speech or film major. However, as much as I believe in a liberal education as an undergrad, graduate school is all about specializing and it IS job training. Don’t enter that PhD program in English unless you’ve really thought through and researched what the career paths might be.

For many graduate level programs, not being offered scholarships is a pretty good indication of how much (or little) they’re really interested in you. It’s a good idea to think about WHY you’re not getting any offers. For professional school programs, less money is not necessarily an indication of how desirable you are, but employment in these fields is not the slam dunk it once was—ask any recent law graduate.

As in any financial planning issue, don’t borrow money for any investment unless you have investigated and thoroughly understand the risks involved. Start young understanding this and you’ll save yourself a lot of flimflam, whether from graduate school admissions offices or “venture capitalists” with yet another hot idea for your hard earned dollars.

Say college savings and most people will think of 529 plans. (Okay, if you’re thinking  “what savings?” keep reading anyway.) But what about the lonely and unloved Coverdell? Might it be worth incorporating  in a savings plan?

Neither the Coverdell (which used to be known as an Education IRA) nor 529 plans give you any tax deduction when you put the money in. The advantage of both of them is that, as long as the money is used for qualified educational expenses, the principal you deposited and any money you’ve managed to make on it comes out tax free.

Most planners, including me, will extol the benefits of a 529 plan: you can sock away a great chunk of money (maybe even enough to actually pay for the college expenses) and if you start early enough and we don’t have another market like 2008-2009, you might actually see significant gains in the account. If you live in a state that gives you a deduction on state income taxes, you might want to give some thought to the quality of that state’s plan and the worth of the deduction to you. However, there are at least one, and possibly two drawbacks to 529s: your investment choices are limited, and some management fees are excessively high.

If you’re used to wrestling with the investment choices in a 401(k) plan, you might be unfazed by the limited range of choices in some 529s. Before choosing a specific plan, be sure you know the range of investments offered. I’d advocate plans that offer a large variety of mutual funds with a company known for low costs (for example, Vanguard or TIAA-Creff), and, consistent with my investment philosophy, I’d choose index funds or ETFs in almost all cases.

So when might you look at a Coverdell? Well, the sad truth is that many people don’t save at all. If you are over 40, I strongly encourage you not to save ONE DIME for college costs unless you are already maxing out your 401(k), 403(b), Roth, SEP-IRA, traditional IRA and any other retirement savings open to you, are saving at least 10% of your income and have at least 3 months of living expenses (6 would be better) squirreled away. Actually, I’d say to do this even if you’re 25, but I know you won’t be scared enough until you’re waving at 40.

If and only if you’ve done that, then start a college savings program. A Coverdell has a limit of $2,000 in contributions for the year, and there’s an income ceiling as well, beyond which you cannot contribute. But for many people, $2,000 might be a do-able amount, an achievable goal, or even a palatable amount to touch the grandparents for.  Two other advantages—a Coverdell can be invested in individual securities, so if you already have a good core portfolio of index mutual funds in a 529, the money segregated in a Coverdell might be used to play “casino”. Note that I would still advise that an index mutual fund portfolio is a far better and more prudent choice, but there’s always a few of you who like to take a gamble. Also, unless Congress changes things in two years, Coverdell funds can still be used to pay K-12 expenses, so if junior ends up at an expensive private school, you might already have funds saved.

Is it worth it to sock any money away if your little angel is already in high school? Probably—if you stagger withdrawals, the money might still be parked for 4 or more years, and can grow during that time. And if he or she decides to get a graduate degree in English or art history, well, you still may need it after that B.A. is in the leatherette case.

Is a Coverdell right for your family? Contact us for information on how an individualized college plan can give you answers.

Right after you plop on the little hat and wrap him or her in the blanket like a burrito! Right. I’m sure there are people who begin planning at birth. Those people are called grandparents. I even heard of one single person who started a 529 plan for her future children, which were still just the proverbial gleam in her eye (not such a bad idea as the 529 fund could be used for her own further education).

Bottom line, earlier is better but it’s never too late. As we all know, the longer that funds are invested, the more time they have to grow. The longer the time horizon, the more potential there is to invest in stocks and other equities, which historically have a better return (but only over long periods). A few thousand dollars invested during a child’s early years can grow to a pretty impressive sum by college. For example, only $2,000 invested once and held for 18 years, 8% return, could grow to nearly $8,000 by the time the child goes to college. Now, $8,000 isn’t going to pay tuition at Stanford, but my guess is you wouldn’t turn it down, either. Same interest, same payment, but do it every year for 18 years and you’d potentially have nearly $75,000. At today’s prices, that’s a pretty nice sum to have socked away.

Really, if you think your child might be headed to an elite private school (and who doesn’t look at their infant and think he or she is a genius?), you’ll probably need more than $2,000 per year. But, some people get so intimidated by the vast price tags currently hanging off of diplomas that they never start at all. Saving something, even a little, but starting early and doing it consistently is almost always the best policy, whether for college, retirement, or any future goal. One caveat: pay attention to fees. There are plenty of “college planners” who work on commission and will sell you all kinds of wonder-investments for a heavy commission. It’ll be wrapped into the investment so you’ll never know what hit you. Even in 529 plans, some plans charge WAAYYYY more fees than others, and this can really eat your returns.

Okay, you haven’t done it and now your kid is in high school. It’s true you don’t have all that much time to save, but it’s still worth a run. You’re probably making more now than you were when Junior was an infant, and you have a better idea of whether you might qualify for financial aid. Now’s the time to take a look at how your investments and assets are distributed, and whether there’s the potential to shift some of them to qualify you for aid (if eligible or borderline) or explore tax strategies to produce a “tax scholarship” if it’s clear you won’t be eligible. Also, Roth and traditional IRAs (for you or the child) might be considered as another potential source of investing for college. Don’t forget Roths need to be invested for 5 years before tax free withdrawals on the gains, and might be reserved for later years of college or grad school.

Try not to wait until junior year—that’s the “look-back” year and you’re going to have to scramble if you want to use asset-moving or tax strategies. Whatever your picture is when you file the FAFSA (the day of) is what will be assessed for financial aid. It’s not too late for some strategies, but you’re going to need to get a move on.

If you’re the ultimate procrastinator and have waited until AFTER the financial aid awards were announced ‘round about May, well, there’s always next year. Next year, with a better plan. Maybe it’s time to call your friendly financial planner? I look forward to working with you…