Paying for college is very expensive, and at times it may seem overwhelming to imagine the cost. After all, the media is always reporting about the decreases in state and federal aid and how financial aid is not keeping up with the increases in tuition price. Still, the majority of college students receive some form of financial aid to make college more affordable than the “sticker price”.
Curious about how much college will cost five to ten years from now? You can project college costs which have historically been twice the rate of inflation. Current increases have averaged 5% to 8%. Cost projection calculators estimate how much college will cost you when your child is ready. You can access this feature on our website at www.nhheaf.org/calcs.asp. Remember, studies consistently have shown that the benefits of a college education far outweigh the cost. So don’t panic. There are three basics for getting started:
Though a financial planner is not necessary to establish a savings plan, an experienced financial planner may be able to assist you in creating a plan that incorporates all of your financial goals in relationship to your resources, risk and lifestyle. How do you go about finding a trustworthy and experienced planner?
When searching for a financial planner, ask about credentials and seek an individual who possesses a special interest and knowledge in the area of Section 529 plans. Make sure the financial planner you choose has achieved certain designations in financial planning. Ask the planner what qualifies him to offer financial planning advice and whether he is recognized as a Certified Financial Planner™ professional or CFP® practitioner, a Certified Public Accountant/ Personal Financial Specialist (CPA/PFS), or a Chartered Financial Consultant (ChFC).
If the planner holds a financial planning designation or certification, check on his background with the CFP Board or other relevant professional organizations. You can call the Board at 800.487.1497 to obtain additional disciplinary information about the professional.
You should also ask whether anyone besides you will benefit from the planner’s recommendations. Some business relationships or partnerships that a planner has could affect her professional judgment while working with you, inhibiting the planner from acting in your best interest. The planner may also have relationships or partnerships that should be disclosed to you, such as business she receives for referring you to an insurance agent, accountant or attorney for implementation of planning suggestions.
For more tips and strategies for selecting a financial planner, visit the SEC Website at sec.gov/answers/finplan.htm.
Saving for college is on the minds of most families. But in this economy, sometimes that is easier said than done. And what about those parents who have been through the financial aid process who are telling you that saving for college only lessens your chances of receiving financial aid? Who should you believe? Does saving for college really pay off?
The truth is that saving for your child’s education is one of the smartest things you can do as a family. Every dollar you are able to save now, is money that you will not have to borrow in the future. But, is there any truth to the idea that saving for college will mean you will receive less financial aid? The fact is that many parents’ assets are protected in the needs analysis formula used to determine financial aid eligibility. This formula includes an asset protection allowance (which excludes your primary residence and retirement funds) based upon the age of the eldest parent. The allowance for a two parent household with the eldest parent aged 45, the allowance is roughly $18,800. For a two parent household with the eldest parent 60 years of age, the asset protection allowance is roughly $27,700. What this means, is that parents can have savings up to this amount, without it affecting their eligibility for financial aid. So, save away! Ask your parents or other relatives to make a contribution to your child’s college fund for his or her next birthday. You can save this money in any manner you choose. Whether in money market accounts, stocks, bonds, mutual funds or a 529 plan, this asset protection allows you to choose the best method for your family. Be aware that there is no asset protection allowance for money saved in your child’s name. Whichever method you choose, saving for your child’s education is a positive step towards making your child’s educational goals a reality.
Below are two examples to showcase how saving actually affects the financial aid eligibility. Please note, the Expected Family Contribution is the amount the federal government determines your family should be able to contribute for one year of college, based on information provided on the Free Application for Federal Student Aid (FAFSA).
In this example, the Expected Family Contribution difference between the two families is $1,151, based primarily on the amount of the Smith family’s assets. The Smith family, in this example, now has those savings available to help pay for school, whereas the Davis family does not.
While the Expected Family Contribution (EFC) in this example are the same for each family, the Smith family has more savings available to help pay for college. The Davis family will most likely need to borrow more money to help manage the cost of college.
To estimate your financial aid eligibility, visit studentaid.gov
A 529 college savings plan is a type of qualified tuition program that was established under Section 529 of the Internal Revenue Code. A college savings plan enables you to save money for a child’s undergraduate or graduate level education in an individual investment account. College savings plans are established by states and typically managed by an experienced financial institution. Anyone can participate in a 529 plan regardless of income of the account owner and in most states, regardless of the age of the beneficiary. A 529 plan is considered an asset of the parent, and not of the student. Anyone can contribute to a 529 savings plan, up to the lifetime contribution limit, and there are no income restrictions. Savings plans earnings are based on the market performance of the underlying investments which typically consist of mutual funds. When selecting a portfolio for your investment you have two options. An advisor-sold fund allows your trusted financial advisor to select a portfolio for you; as a result you will pay a percentage of sales commission. A direct-sold fund allows you to choose the portfolio of investments yourself with no sales commissions and lower fees. Contributions into the 529 college savings plan grow federal and state income tax free. All withdrawals used for qualified higher education expenses (tuition, fees, books, supplies, room and board) are exempt from federal and state income tax.
529 Prepaid Tuition plans are guaranteed to increase in value at the same rate as college tuition. Essentially, by contributing to such a plan, you lock in tomorrow’s tuition at today’s prices. Prepaid tuition plans are broken into units (1% of current tuition). You can purchase as many units as you wish. One unit will be worth 1% of future tuition costs no matter how much tuition prices increase. These units are in the name of a child and can be presented at participating institutions, including institutions that join the program after the certificate is purchased. A prepaid tuition plan can be transferred to another member of the family, including children, parents, grandparents, cousins, nieces, nephews, aunts, and uncles. Prepaid tuition funds can only be applied to tuition and fees. One consideration to cover the total cost of college would be to invest in both a 529 Savings Plan (for books, supplies, room and board, other college expenses) as well as a 529 Prepaid Tuition Plan (for tuition). Currently, eighteen states offer a prepaid tuition program.
Private College 529 plans allow families from any state to pay today’s tuition price at any of the plan’s member colleges. Private College 529 plans have no start-up fees, no maintenance fees, and no annual fees, and are free from federal taxes. Currently there are 276 schools in 39 states participating in the Independent 529 plan. This certificate must be held for a minimum of 36 months before it can be redeemed. Just like other 529 plans, the independent 529 plan is counted as an asset of the parent. Prepaid tuition plans are exempt from federal income tax, and are often exempt from state and local income taxes.
According to the U.S. Securities and Exchange Commission, knowing the answers to these questions may help you decide which 529 plan is best for you.
An Affinity program creates brand loyalty by offering a rebate to consumers in exchange for buying certain products or shopping at certain retailers. These programs provide college savings incentives including contributions to a 529 college savings plan. Parents or grandparents, friends and siblings just register their credit cards with the affinity program and these programs track purchases at participating stores. UPromise and Baby Mint are examples of affinity programs. Often, investment companies that manage 529 college savings plans also offer rebates to customers. For example, New Hampshire’s college savings plans (The UNIQUE College Investment Plan and the Fidelity Advisor 529 Plan) are managed by Fidelity Investments. Fidelity provides a rebate to its credit card customers in the form of funds directed to a friend or family member’s Fidelity-managed 529 Plan account. Affinity programs are a great way to supplement regular long-term investments.
U.S. Savings Bonds are backed by the full faith and credit of the federal government. When determining a family's Estimated Family Contribution, savings bonds are counted as an asset of the bond holder. As of January 2012 paper savings bonds will no longer be available. Series EE bonds and Series I can be purchased at face value in digital form from TreasuryDirect.gov, the government's website for buying and redeeming bonds. Both Series EE and Series I digital bonds are purchased at face value and redeemed at face value plus interest. Series I bonds offer a fixed rate of return and a variable semiannual inflation rate combined. Series EE bonds earn a fixed rate of return. Within certain guidelines, U.S. Savings Bonds are federally tax free for qualified education expenses. Visit savingsbonds.gov for rates and more information.
A Coverdell Education Savings Account is a tax-advantaged education savings account that you can establish for a child under the age of 18. Contributions (currently, a maximum of $2,000) are prohibited once the beneficiary turns 18. To qualify for the plan’s tax benefits, the income of the account owner must fall within certain guidelines detailed at irs.gov in Publication 970 Tax Benefits for Education. This savings plan is also counted as the asset of the parent. Amounts deposited into the account grow tax free until distributed as long as they are used for qualified postsecondary educational expenses such as tuition, fees, textbooks, supplies, equipment, and room and board.
Roth IRA is another type of personal savings plan that offers tax benefits to encourage retirement and education savings. The same contribution limits that apply to traditional IRA’s also apply to Roth IRA’s. Contributions to a Roth IRA are not tax deductible, but if certain conditions are met, (i.e. distributions are not more than your qualified education expenses) distributions will be tax free. Contributions to your Roth IRA grow tax free. Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. However, you can take distributions from your IRAs for qualified higher education expenses (tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution) without having to pay the 10% additional tax.
Uniform Trust to Minor (UTMA) and Uniform Gifts to Minor (UGMA) accounts are established for the benefit of a child. Once created, the beneficiary cannot change and custodianship is terminated when the child reaches the specific age established by state law, typically 18 or 21. While many parents and families open an UTMA or UGMA account to save for college on behalf of the child, the money does not technically have to be used towards college expenses. Because there is flexibility in how the money invested is eventually used, UTMA and UGMA accounts are considered an asset of the student when completing the FAFSA. Learn more at savingforcollege.com