ABC’s of Planning for College
By Bobbie Salow
Senior Practice Manager
Starting to plan for college now will not only have long-term benefits for your child, but also your wallet.
Can you afford to send your child to college? The answer is yes, but you will need a plan for how to pay for it. In this article, Morey & Quinn Wealth Partners outlines some primary concepts to help you get started — what we’re calling the ABCs of planning for college:
A: Ask About Financial Aid
B: Break Your Plan into Bite-Sized Pieces
C: Clearly Outline the Costs
Before we begin, here are a few things to keep in mind:
- Many full-time students at four-year colleges get financial aid to help them pay for college.
- There are often tax savings you can take advantage of when saving for your child’s college expenses. Certain states offer tax deductions for making contributions to eligible college savings plans.
- There are ways to cut college costs, such as choosing a community college, applying for scholarships, taking a gap year, or having your child work while going to school to save money.
- Education can be a good investment: Students who earn bachelor's degrees should expect to receive higher incomes, on average, than those who only have a high school diploma.
Ask About Financial Aid
Before getting overwhelmed about the price tag of a college education, keep in mind that families typically pay for college using a combination of income, savings and financial aid, which can include scholarships, grants and loans. Scholarships and grants are the best financial aid because it's money your child doesn't have to repay.
The majority of a student's financial aid from scholarships, grants, and loans comes from the federal and state government or directly from the college. There may be other scholarships available, and worth applying for, but your primary sources will likely be state and college financial aid applications, and the free application for federal student aid (FAFSA).
Loans must be paid back with interest. Some college loans, like those from the federal government, have lower terms. Students will be solely responsible for paying back federal college loans. Parents can take out a PLUS loan, which would be their responsibility to pay back. When you choose a loan option wisely, borrowing money for a college education can be a wise investment.
Expected Family Contribution
Expected family contribution or EFC is the dollar amount that colleges use to assist in deciding on how much financial aid they'll offer your child. Your family's EFC is calculated using the information you and your child supply on financial aid forms. Your EFC is an estimate of what you can afford to pay for college. It's used as a base by the government and or the college to make financial aid decisions. It's not a number on a bill, it doesn't reflect the exact amount you're expected to pay.
Break Your College Savings Plan into Bite-Sized Pieces
The best thing you can do is start saving today! Many families set aside a portion of their income every month for their child's future college expenses. Whether or not you've already started saving, there are special college savings accounts that may benefit you, and help you break a lofty financial goal into bite-sized pieces you can manage.
Two examples are 529 college savings plans and Coverdell Education Savings Accounts (ESA). With 529 plans and Coverdell ESAs, you can earn interest on the money you put in, similar to most savings accounts. But unlike savings accounts, the money can be invested, giving you the opportunity to earn more over time. Some plans allow your contributions to grow tax-free and also allow you to take out the money tax-free if the funds are used towards qualified education expenses. These plans offer many opportunities to grow and extend your savings towards college.
Understanding the different college savings vehicles can help you choose the right one for your needs.
529 College Savings Plan
Coverdell Education Savings Account
1. Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Federal law allows distributions for tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private or religious school (“K-12 Tuition Expenses”) of up to $10,000 per beneficiary per year. Under New York State law, distributions for K-12 Tuition Expenses will be considered non-qualified withdrawals and will require the recapture of any New York State tax benefits that have accrued on contributions.
2. The maximum aggregate balance of all accounts for the same beneficiary in qualified tuition programs sponsored by the State of New York, as established by the Program Administrators from time to time, which will limit the amount of contributions that may be made to accounts for anyone beneficiary, as required by Section 529 of the Internal Revenue Code. The current maximum account balance is $520,000
3. Maximum gifts are $150,000 per beneficiary from married couples and $75,000 from single tax filers. No additional gifts can be made to the same beneficiary over a five-year period. If the donor does not survive the five years, a portion of the gift is returned to the taxable estate.
4. Strategic Insight, 529 Industry Analysis: 2019.
5. Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.
Clearly Outline the Costs
When a child goes to college, there are often more expenses to be covered than tuition alone. Understanding the true costs of college will help you to be prepared. College costs may include:
- Tuition and fees
- Room and board
- Books and supplies
- Personal expenses
- Transportation, including airfare
Keeping Costs Low
- Students have a variety of options for keeping their college costs down. Consider that your child could:
- Live at home while they attend college, saving them money on room and board.
- Choose community college. Most two-year colleges have lower tuition.
- Gain a two-year associate degree or certificate and join the workforce.
- Use community college as a supplemental option to a four-year bachelor's degree by transferring to a four-year college after one or two years.
- Graduate from college early. It will save money if your child can earn enough college credits to graduate in less than four years.
- Take Advanced Placement (AP) classes and exams in high school. Many U.S. colleges offer credit for qualifying scores on AP Exams.
- Take classes at a community college the summer before entering college—but, it's crucial to find out if the course credits are transferable.
- Get a part-time job. Your child could reduce some of their college costs with a paycheck from a job. Some colleges also offer work-study programs.
Financial Planning, Tailored to Your Life
As your partner for a well planned life, we are here to help you plan strategies, so you can feel better prepared to meet the increasing costs of a college education. Call us for financial planning - and life planning - that’s tailored to your unique financial priorities.
Let the Morey & Quinn financial advisors show you the value of a Well Planned Life.
Morey & Quinn Wealth Partners
Raymond James® LIFE WELL PLANNED.
Toll Free: 877.541.6593
11225 Davenport St, Suite 109
Omaha, NE 68154
Any opinions are those of Bobbie Salow, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.
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