Education Planning: Is College Affordable? How Can I Save for It?
Depending on your long term goals you may have for income, family, career, etc, securing a college education is a stepping stone for success and with one, you are able to understand the world much better. However it comes with a catch, there is a cost to it, which may be one of your biggest purchase close to buying a home and a car. Considering the cost of college, it is important that you are strategic and that you have a plan in place. To begin planning, evaluate how much you have saved currently and how much more you want to save towards your college savings fund. You’ll be surprised how much you’ll be able to come up with for later. Along with focusing on growing a college savings fund, consider your investment options, contribution limits, financial aid package, and other factors that make the most financial sense for you and your family.
There are several different college savings options however the most common include the 529 savings plan, Coverdall ESA, Roth IRA, and UTMA/UGMA. Contributions to a 529 savings plan and Coverdall ESA are tax-deferred and earnings are tax-free and can be used on qualified education expenses. As an account holder of the 529 plan, you can change the beneficiary to an eligible family member that is related to the beneficiary at any time. Qualified education expenses include tuition, fees, books etc. Considering this, coming up with a strategy is very important at this point.
The difference between 529 plans and Coverdall ESA is in the contribution limits. Contribution amount is limited to $2,000 annually for an Coverdall ESA until the child is 18 years old.
Custodial UGMA/UTMA accounts provide the flexibility with the way you invest as opposed to 529 savings plan. This was the way parents and grandparents saved for college before 529 plans and other tax advantage accounts for college savings came in the midst. However the caveat is that these investments may be subject to kiddie tax. Also they allow withdrawals to be spent in whatever way that may benefit the child - such as room and board, medical expenses etc. In addition, UGMA/UTMA accounts belong to the child and must be given to the child by the age 21.
Another important factor to consider is the impact these savings accounts have on a child’s eligibility for financial aid. So it is important to save assets strategically. The information reported on the Free Application for Federal Student Aid (FAFSA) in relation to the family’s income and expenses help the general government determine a student’s Expected Family Contribution (EFC) and distribute funds accordingly. The lower the EFC, the greater the financial aid package a student is eligible to receive.
5.64% parents available assets are counted towards a student’s EFC.
20% of student available assets are counted toward’s a student EFC.
Both the 529 Plan and the ESA are considered assets owned by the parents. UGMA/UTMA amounts are considered assets owned by the student. For purposes of financial aid, it makes more sense to have more funds in a 529 Plan or an ESA because assets owned by parents have a lower EFC.
Other factors to consider in relation to the college savings options mentioned above include account fees, state tax implications and the options of creating a Roth IRA for your child. Although saving for college is the most important task and will make a difference in getting your child ready for adulthood, you will want to consider all of your options and ensure you are planting your investments strategically and it is returning the most money possible towards your family future.
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This material has been prepared for informational purposes, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.