College-Planning Tips for Special-Needs Families

Question: As the parent of a special-needs child, are there any strategies I should be using to prepare for the cost of his future education?

Answer: The definition of special needs is very broad and encompasses everything from mild learning disabilities to severe cognitive and physical issues that make life a daily challenge. The term "special needs" is often used to indicate that a child meets eligibility criteria to receive special government services as a result of his or her disability or disabilities.

And just as the nature of disabilities that fall under the special-needs umbrella can be vastly different, so, too, can the educational plans involved in raising a special-needs child. For example, a parent of a child with a learning disability such as dyslexia may well expect that that child will one day attend college and therefore begin saving toward that goal, whereas a parent of child with more severe cognitive impairments may be unsure whether that child will ever go to college and decide to devote resources elsewhere.

For many families with special-needs children, educational costs might not be a concern until after the child graduates from high school. That's because federal law requires that school districts make special accommodations and offer services to meet the needs of these children (the situation can be more complicated for special-needs students in private schools, whose families may end up paying for some services out of pocket). But what happens after high school?

College Enrollment Increasing Among the Disabled
The good news is that an increasing number of students with special needs are pursuing an education beyond high school. The percentage of young people (ages 15-19) with disabilities enrolling in postsecondary schools jumped from 15% in 1987 to 32% in 2003, according to statistics from the U.S. Department of Education. Nearly 9 in 10 two- and four-year colleges reported enrolling students with disabilities during the 2008-09 academic year, with schools typically offering accommodations such as extra time to take exams, help with note-taking, and adaptive equipment and technology.

With more opportunities for special-needs students to attend college, families that years ago would not have thought about saving toward that goal may need to consider opening a 529 account or another college-savings vehicle for their prospective students. Special-needs families looking for a way to save for both K-12 and college expenses should consider the Coverdell Education Savings Account. Coverdell contributions grow tax-free, and distributions also are tax-free if used for qualified educational expenses, which for special needs students include services required to allow them to attend school. The account normally must be established before the beneficiary turns 18, and funds must be spent by the time he or she turns 30. But these age restrictions are waived for special-needs beneficiaries. Coverdell accounts are limited to a $2,000 annual contribution per beneficiary, and household income limits do apply.

A 529 account provides tax-free growth and tax-free distributions if used to cover qualified college expenses, and contributions may be deductible on state income taxes. As with a Coverdell account, funds invested in a 529 also can be used to help pay for services that allow the beneficiary to attend college (though not for services while in elementary or high school). For families unsure about opening a 529 account for a special-needs child for fear that the child won't attend college, there are other options should that happen. As discussed in this article, unused 529 funds can be transferred to another family member's 529 account. So if a special-needs child is unable to attend college, his or her 529 funds can be transferred into the 529 account of a sibling or another family member. 

However, if the special-needs child does not attend college and there is no one else to transfer the 529 funds to, you might have to pay taxes on account earnings plus a 10% penalty when you take the money out. The penalty is waived, according to this Internal Revenue Service document, if it is proven that the beneficiary "cannot do any substantial gainful activity because of his or her physical or mental condition" and a physician determines "that his or her condition can be expected to result in death or to be of long-continued and indefinite duration."

Another college-funding source special-needs families should be aware of are scholarships. Some organizations focused on specific disabilities offer scholarships to students with those disabilities, so it might be worth checking with any groups that apply to see if your child is eligible.

Families thinking about sending a special-needs child to college can learn more from websites such as thinkcollege.net and ahead.org. Accommodations and services for special-needs students can vary greatly from college to college, so make sure you investigate well in advance whether a given school will be the right fit for your student's special needs. A campus visit can be especially important in this regard.

A 529 Plan for Special-Needs Families?
One piece of federal legislation that advocates for the disabled are watching closely--and that could have a profound financial impact on the families of special-needs individuals--is the Achieving a Better Life Experience Act, or ABLE Act. The bill, which was first introduced in 2006, would amend Section 529 of the IRS code--the section that created 529 college-savings plans--to allow for tax-free savings accounts for the benefit of individuals with special needs.

A 529-ABLE account, as it would be called, would expand the list of qualified expenses eligible for tax-free distributions, including:

• education
• housing
• transportation
• employment support
• health care

A 529-ABLE account would have no age restrictions on beneficiaries (unless imposed at the state level) and would be supplemental in nature, meaning that families could still receive benefits from insurance and federal entitlement programs. The bipartisan bill is sponsored by Sen. Robert Casey, D-Pa., and Rep. Ander Crenshaw, R-Fla., and has 29 co-sponsors in the Senate and 139 in the House of Representatives. More information on the ABLE Act, including text of the bill, may be found on the websites for Casey and Crenshaw. There's no word on if or when the bill might come up for a vote, but a spokesperson for Casey's office said the bill's sponsors hope to have it included as part of a larger tax bill introduced during the current Congress.

One Piece of a Broader Picture
Of course, saving for education is often just one in a complicated array of financial challenges facing special-needs families. "For many of these families, education is a component, but it's so much larger," says Michael Duckworth, a Pittsburgh-based private wealth advisor and managing director for Merrill Lynch who serves many families with special-needs children. Duckworth points out that for parents of children with disabilities, financial planning presents a whole host of challenges other families never have to consider.

Medicaid and the Supplemental Security Income program may be of some help to families with special-needs children. However, they are needs-based, and households with middle or upper incomes might not qualify. In such cases, families must rely on insurance or pay out of pocket for services such as physical therapy and equipment such as a wheelchair. Some families establish a special- or supplemental-needs trust for the benefit of their child that is designed to help pay for their continued care in adulthood while qualifying them for Medicaid. (As a general rule, eligibility for Medicaid means that recipients may not have more than $2,000 in assets in their own names.)

Duckworth recommends that parents of special-needs children get an early start in thinking about the impact their child's disability will have on the family's finances. "The most important thing is to get an understanding of what the future need is going to be," he says. "As early as you can, determine what your child is going to need in the future and do your best to figure out what it will cost. Once you have that number, it is crucial that you plan how you will be able to meet that financial need in the future." 

Special-needs calculators such as those provided by Merrill Lynch and MetLife can help you in planning. You may also want to consider working with an advisor experienced in special-needs planning.

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