1/30/08

The methods for saving money for college are widely varied and it can get confusing. Different plans with different implications towards aid and taxes which impact one another in different ways and the best strategies for saving in the early years of a child’s life may not be the best strategies for saving as college time looms nearer.

My Savings Plan:

My Mother was absolutely brilliant! She pimped my sister and I out to television commercials and modeling at an early age. We each only did a small handful of them in our local hometown of Indianapolis, Indiana, but she allowed us to keep 10% of what we earned for ourselves but took the other 90% and placed it into savings accounts for our respective college educations which earned compound interest over the next 12 years or so and made a significant difference towards our tuition and expenses. Of course my sister went on to college while I tapped the money once old enough and purchased guitar equipment and joined a touring rock band and for all intents and purposes, gloriously squandered my youth! I would not recommend the path I personally took, but I do make my living these days as a full-time musician and own my own entertainment business founded upon the things I did actually manage to learn during the mayhem of life on tour and making records, so I will leave the sensibility judgments up to you.

My personal feeling is that college is very important for a great deal of people and the life paths they wish to pursue, but it is not always the right call for everyone and just wasn’t the right call for me. That said, I do take the odd community college course these days every now and then when there is a skill or two I feel is important for me to pick up, but mostly I just look stuff up on the internet when there's something I wish to learn.

THE PURPOSE OF THIS ARTICLE:

The purpose of this article is to give you, the reader an overview of some things to expect along with a few strategies you may wish to consider doing further research on. The in-depth details of each individual strategy would be far too lengthy to reasonably post here and quite honestly, would not make for a very good read. I would recommend doing a web search for the strategies that interest you the most and reading up on them more thoroughly from a variety of different sources and be careful as some informational sources are geared towards selling you their financial plan and may not have your best interest at heart. It may also be a good idea to meet with a professional, independent counselor or two which specialize in preparing college savings strategies.

FOR THOSE WHO EXPECT TO BE SEEKING AID:

The I think the biggest driving point I continually ran into in my research for this article was that if you expect to rely heavily on aid to put a child through college, then it is best to have all of your savings in the parent’s names and nothing in the child’s name. Reason being that when the EFC (expected family contribution) is determined, federal aid formulas count only about five and a half percent of parental assets but a whopping thirty five percent of the child’s assets! Thus, the more money in your child’s name, the less aid they will likely receive. Retirement accounts such as 401(k) and IRA are not counted towards the EFC.

While it is true that federal aid formulas count only about five and a half percent of parental ASSETS when determining EFC, parental INCOME is counted at up to forty seven percent! Therefore, you will want to show as low of a number as possible for your income when applying for aid for the year preceding your child’s entry into college. Aid decisions are based upon financial information from the tax year prior to the year of your child starting college. It is also wise to be especially aware that capital gains are counted as both an asset as well as income, so you get double-whammied on this one!

The 529 Savings Plan -

529 Savings Plans can be a great way to save for college and they come with some good tax breaks as well, with contributions being tax-deductible in many states and withdrawals being completely free of federal tax. There are no age restrictions or income limitations with a 529 savings plan. You can start one regardless of how old your beneficiary (child) is. Most 529’s allow you to save anywhere from $100,000 to $270,000 per beneficiary.

A 529 is treated as the account holder’s asset (the person who opened the account), but the earnings portion of the withdrawals are counted as the child’s contribution and assessed as much as 50 percent when determining the EFC. Therefore, it is usually best to leave the account untapped until the last year or two of college to avoid as much negative impact on aid as possible.

529s OWNED BY GRANDPARENTS HAVE NO IMPACT ON FINANCIAL AID!
Do what you will with this evil piece of information and funnel your funds accordingly!

Hey, Let’s ALL Go To College! -

The more family members in college at the same time, the more aid is made available to each member. This includes parents, but schools will usually wish to see some documentation proving the parents are legitimately going for a degree and not just trying to obtain extra aid.

FOR THOSE WHO EXPECT TO BE PAYING THE ENTIRE COST THEMSELVES:

Coverdell Education Savings Account (ESA) -

Money from an ESA may be used for pre-college education expenses and qualified withdrawals are tax-free.

Custodial Account -

This is a method of transferring money to a minor and holds some tax advantages. Most or all of the earnings in a custodial account are taxed at the child’s rate and investments into one of these accounts can earn some money tax-free each year.

Tax Breaks -

There are 2 federal tax credits you may be able to take advantage of - The Lifetime Learning Credit and The Hope Credit in years in which you are paying tuition. You may also deduct the interest on student loans up to $2500 per year if your income is less than $130,000 (married filing jointly) or $65,000 (single).

Withdrawing Against A Variable Life Insurance Policy -

This one is rather complicated and varies with different underwriters. Do your research, speak with a few different professionals and compare plans.

Final Thought:

Don't be a schmuck! Go to college, dummy!

Please visit my website at http://www.letsgetahead.com for more great articles like this one!