In today’s highly competitive college admissions process, families must never lose sight
of the fact that nothing is more important to parent or child than the student’s acceptance to college. Your second priority is how to pay for it.
Planning for college can begin as early as birth, and for that matter, even before birth. Financial planning in the early years can make all the difference in the world when it comes time to have to cough up all that cash! The following are some of the best ways to save for college:
Custodial Accounts: With Uniform Gift or Uniform Transfer to Minors Act Accounts (UGMA or UTMA), parents, grandparents, etc. can each contribute up to $11,000 per student per year (2005).
This money can be used for college or any other purpose. Although the money remains in the student’s name, the custodian, usually a parent, has absolute control over the account – i.e. stocks, bonds, mutual funds, savings, etc. UGMA accounts accept cash only. UTMA accounts accept cash and property.
The Downside: UGMA and UTMA accounts are irrevocable gifts that are considered student assets. Since students have no asset protection allowance, these assets are assessed at either 25% per year at schools that employ the institutional methodology, (Ivy League and high profile private colleges), or 35% per year at all the rest that employ the federal methodology! Therefore, this option must be used with extreme caution!
Education IRA’s a/k/a EIRA’s: Single parents with an adjusted gross income (AGI) of up to $110,000, and joint filers with AGI’s up to $190,000, can contribute up to $2,000 annually to an EIRA. Earnings accumulate tax-free and can be withdrawn tax-free without penalty to pay for a private elementary, secondary, or college education.
The Downside: With the current limit of $2,000 (2005), fees can eat up much of the gains in the early years when balances are small. Contributions to EIRA’s are not tax deductible and all colleges consider EIRA’s student assets and apply the 25% or 35% assessment when calculating financial aid. What’s even worse is what happens when distributions are made from these accounts. Financial aid is automatically reduced dollar for dollar, because in addition to being an asset, the funds have now become a resource! When these funds are legally repositioned outside of the financial aid formulas, then none of the money is assessed!
State Plans a/k/a 529 Plans: Anyone can open a 529 Plan in his or her own name and designate a student as the beneficiary. Up to $50,000 ($100,000 jointly) may be contributed over five years to a maximum of $246,000. Funds grow tax-free and withdrawals since 2002 have been tax-free as well.
Downside: Monies contributed are not tax deductible, and there is little or no control over how the funds are invested. Also, there is a 10% penalty for withdrawals not used for college, and 529 Plans can actually decrease chances for a large grant or scholarship – and that’s not all. When there are distributions from these accounts, financial aid is automatically reduced dollar for dollar! As with EIRA’s, having the funds legally repositioned elsewhere, will result in no assessment whatsoever!
Retirement Plans: An IRA, HR10 (Keogh), Pension, SEP, 401(k), 403(b), 457 or any other qualified retirement plan should also be considered when saving for college. Such plans are not regarded as assets and are outside of the financial aid formulas. While the account value is not considered an asset, the annual contribution made is added back to the AGI for an income assessment! The big print giveth, but the small print taketh away!
Non-Qualified Savings Plans: These are accounts strictly set up to provide funds to be used to pay for the Expected Family Contribution (EFC) or any unanticipated college costs. Families need to set up these accounts as early in the student’s life as possible, so there will be adequate money to pay such costs when the time comes.
Remember, by the time students enter high school, consideration should be given to reducing “high risk” investments. Never gamble with money that’s earmarked for education! And, never lose sight of the fact that all monies saved for college in the early years will not serve their purpose unless the student prepares for and successfully completes the admissions process.
This is one of a series of articles by college admissions and financial aid expert, Reecy Aresty, based on his book, “Getting Into College And Paying For It!” For further information or to contact him, please visit www.thecollegebook.com.