The 411 on 529
Are you looking to save for your child’s college education, but you’re concerned about the kind of impact such savings can have on their eligibility for financial aid? If so, read on, because in this article we’re going to share with you a financial plan that enables you to sock away money for your kid’s schooling, while helping to minimize your Estimated Family Contribution (EFC). For those of you who haven’t heard of it before, the EFC is the amount of money financial aid officials believe you should be providing to fund your son or daughter’s college education. Your son or daughter’s financial aid package will be based on the difference between the cost of the college and the EFC. In other words, the larger the difference between the cost of college and the EFC the larger amount of aid a student can be eligible to receive.
The 529 Plan
A 529 plan is a tax-advantaged savings plan that was created to help parents save for their child’s college education. There are two variations of 529 plans: the pre-paid tuition plan and the college savings plan. The tuition plan is often sponsored by your state and enables individuals to purchase units or credits at participating colleges that can then be used for tuition. It locks in the price of tuition at the time you begin the plan, which helps minimize the costs associated with tuition increases and inflation. These plans usually require students to be residents of the state and are meant for public institutions, but recent changes have made them more amenable to those seeking private or out-of-state alternatives. The college savings plan is exactly what its name implies: a savings plan that parents can use to pay for their child’s tuition, room, board, and other education-related expenses. This plan is offered by most states, and parents can invest in any available plan. So you’ll want to look for the state plan that offers the best performance with the lowest fees. According to the Web site savingforcollege.com, New York, Georgia, and Utah have had the top three “best performing 529 college savings plans” over the last three years.
Saving Doesn’t Have to be Taxing
529 plans are known for their tax advantages. These plans enable parents to save for their child’s education without paying tax on the earnings or withdrawals, as long as the withdrawals are used for qualified education-related expenses. State taxes will depend on the state, so check with your local state department of education to learn if you can get a state deduction on your investment.
Financial Aid Impact
Keep in mind that 529 plans can influence your child’s eligibility for financial aid. It is important that the plan is put in the parent’s name, with the child designated as a beneficiary. The goal is to minimize your EFC, and the EFC takes into account 20% of the student’s assets, but only approximately 5.6% of the parent’s. By placing it in your name and not your child’s, you are helping to reduce the EFC.
Things to Look For
There are direct 529 plans that enable investors to do it themselves and save on fees. The alternative are advisor-sold plans which bring in the help of a financial professional. It’s a choice you’ll have to make, though it is beneficial to have an expert in your corner. As for the kind of financial professional you’ll want to hire, as with any kind of financial transaction make sure you ask a lot of questions. Find out what the advisor is going to do for you in relation to college savings, what kinds of strategies they’ll employ, and what experience they have dealing with college financial aid. As for your 529 plan, determine if it’s available from your state or a sponsor. Find out what fees will be charged and penalties assessed for withdrawal. Also ask about investment options and any special benefits for residents of the state. As for limits on the account, the maximum limit can be as much as $320,000 and there are very low contribution minimums. It is highly recommended that you explore your options for financing your child’s college education as early as possible. This will ensure you have enough time for your investment to grow and provide those much
