I have a daughter turning two in November. Rest assured, I have calculated the costs for college already. In sixteen years, when I send her off to a North Carolina public university, our annual cost will be about $61,000 per year. That number has me hoping for a very academically gifted or athletic child.
There is hope out there for other parents like me. For instance, I have options for saving for her college now through several different vehicles, such as UTMA accounts, Coverdell Education Saving Accounts, Series EE or I Bonds, and 529 education savings plans.
I prefer the 529 education savings plans for their built in flexibility. First, the 529 plan has a very high contribution limit that I’m likely to never hit, while some of the other plans have a $2,000 contribution limit per year. After-tax contributions grow tax-free and they are withdrawn tax-free when used for tuition and expenses at a qualified university. Also, when the grandparents want to give another birthday gift, they can easily contribute to this plan. Contribution amounts can be as low as $25 per month – every little bit helps. Most 529 plans are offered through an investment company with a wide range of investment options. Annual account maintenance fees are typically low.
For financial aid calculation purposes, the assets in a 529 plan started by a parent will be considered those of the parent. This means a lower expected family contribution (EFC) and more financial aid possibilities compared to assets held directly by your child.
Hope for paying for college can come in other ways as well. Parents’ qualified retirement savings do not factor into the financial aid calculations. Even six-figure balances in an IRA or 401k account are not considered in determining financial aid for your child. And, there are some instances when those assets can be used for higher education expenses without tax penalties. If grandparents are owners of a 529 college savings plan, the investment doesn’t factor into the initial financial aid calculation at all (although distributions from a grandparent’s 529 plan will be considered an asset of the child in future years). Out of the box thinking may have you looking at private schools that offer scholarships and grants, which may make that institution less expensive than a public university.
For parents, grandparents and students ready for a more detailed take on saving for college, the Savvy Women of Starks Financial Group have you covered. On January 17, 2017, we will host Laura Misner of the College Foundation of North Carolina. Laura will address, at a deeper level, strategies all of us can use to manage the expenses of college and help our students qualify for more financial aid. For more information, check out www.starksfinancial.com/savvywomen.