By Jessica K – When you think about sending your child to college, the first thought that probably comes to mind is cost which may leave you thinking “how the heck am I going to pay for it?”. My husband and I are expecting our first child in May, and we’re already discussing funding a 529 college savings plan (more on that below). It seems a little ridiculous that we’re thinking about saving for our unborn child’s college education when we haven’t even paid off our own student loan debt, but something tells me this is an issue that won’t be going away anytime soon. We’ll likely start saving early and pray that we see college cost reform before our little one turns 18.
529 College Savings Plans
If you’re a parent with a younger child, consider starting to save now. A 529 savings plan is an education savings plan used to set aside funds for future college costs. You can contribute up to $14k per child per year ($28k for married couples filing jointly).* While there’s no Federal tax deduction for making the contribution, assets grow tax-free and earnings are never taxed if the money is used to pay for qualified college education expenses.
Some states do offer residents a tax deduction or credit for contributions made to a 529 plan. There are a number of 529 plans available and unless your state offers a tax deduction, you can select a plan sponsored by a state other than the one in which you reside.
*There are opportunities to front-load contributions as well as lifetime contribution limits that come into play.
For those of you with older children, maybe you didn’t get that head start on saving for college or maybe you did and you still fear you haven’t saved enough? While at a Financial Planning Association’s conference last fall, I attended a session with Lynn O’Shaughnessy, founder of www.theCollegeSolution.com. She shared a number of great facts regarding college planning and also some tools parents (and kids) can use to estimate how much college will truly cost them.
- 89% of private school students (and 58% of public school students) will receive a price break and the average private school discount is 54%.
- If you have two or more children in college concurrently, you will receive more financial aid than if you just had one child in college (little solace for parents doubling up on college expenses).
- It’s better for parents to save for college than to not. A family’s expected contribution includes 5.64% of parent assets that are held outside of retirement accounts. For example, if you saved $20k for college, your expected family contribution would only increase by $1,128. (Some taxable money is sheltered in this calculation and there is an asset allowance based on the parents’ ages).
- Assets in 529 plans owned by the parent or student are considered parental assets in the calculation above, however, this is not true for 529 plans owned by grandparents. Assets in a 529 plan owned by a grandparent are not factored into the EFC calculation until funds are distributed. Save this money until the second half of your child’s junior year and then file financial aid forms for senior year. Use this money to pay for senior year or grandparents can then transfer ownership to parents.
**Information courtesy of Lynn O’Shaughnessy of www.TheCollegeSolution.com .
While there’s no arguing that college is expensive, educating yourself about your child’s options and making smart decisions can ease some of the burden. The key takeaway is to be proactive, not reactive, which means having a serious discussion with your child about how much college costs, how much you can afford to pay, and how much he/she will be personally responsible for.
Use some of the online tools listed below and visit www.collegeboard.org to compare colleges and estimate your Expected Family Contribution (EFC) at each school. Partake in these exercises before your child applies to schools. Much like your child has a list of “reach schools” based on his academic performance, maybe you have a list of “reach schools” based on expense. Doing this research and setting expectations before acceptance letters start rolling in might lessen the blow if your child applies and gets accepted to that reach school that you decide you really can’t afford.
If your child will be responsible for paying for some or all of his college education expenses, make sure he understands the consequences (what his loan payments will look like after school and how that will impact his standard of living). Also help your child research what he can expect to earn in the career of his choice. Is paying $x for school worth it to earn only $y/year?
Online Tools
- Want to know your Expected Family Contribution (EFC)? The College Board provides a free EFC Calculator on its website: College Board EFC Calculator
- Most schools publish their own EFC Calculators. Do a Google search for “Net Price Calculator + School Name”. Don’t use the free Federal calculator – it’s basic and bad!
- You can check out college completion rates at: collegecompletion.chronicle.com
- On the College Board’s website, you can also search for and compare colleges based on a number of factors including how generous their financial aid packages are: bigfuture.collegeboard.org/college-search
- Visit www.savingforcollege.com to learn more about 529 college savings plans.