The Hard & Easy Ways to Pay for College

You’ve dreamed of the day your child would go off to college. What you didn’t dream of was the cost. For that, you had nightmares.

There are two ways to make college affordable; the hard way and the easy way. The easy way is to start saving the day your child is born. The hard way is to not start saving the day your child is born.

The Easy Way

Your beautiful new family comes home from the hospital. You open and contribute monthly to a 529 plan.

A 529 plan is a tax-advantaged investment vehicle in the U.S. designed to encourage saving for the future higher education expenses of a designated beneficiary. A 529 plan can provide a very easy hands-off way to save for college by completing a simple enrollment form and signing up for automatic deposits. The ongoing investment of the account is handled by the plan, not by the donor. A 529 plan is the most flexible method with tremendous advantages for long-term college saving.

The primary benefit of the 529 plan is that the principal grows tax-deferred, and distributions for the beneficiary’s college costs are exempt from tax.

With this plan, the donor maintains control of the account, yet the account is out of the owner’s estate. With few exceptions, the named beneficiary has no rights to the funds.

Anyone can contribute to the account.

Unlike other college funding methods such as the Coverdell Education Savings Account and the Roth IRA, there are no income limitations that make you ineligible for an account.

Most states have no age limit for when the money has to be used. If the child gets a scholarship, any unused money can be withdrawn without paying a penalty (just the tax).

If funds are not used for the intended child, the funds can be used for another beneficiary who is a family member of the original beneficiary. If the money is ultimately not used for eligible education purposes, any growth is taxed as ordinary income, and subject to a 10% penalty.

Many parents are often concerned how having a 529 plan will impact their chances of getting financial aid. A 529 account owned by a parent for a dependent student is reported on the federal financial aid application (FAFSA) as a parental asset. Parental assets are assessed at a maximum 5.64% rate in determining the student’s Expected Family Contribution (EFC). In other words, the amount of federal financial aid your child is eligible for will decrease by no more than 5.46% of those assets.

The Hard Way

Your beautiful new family comes home from the hospital. You don’t start saving diligently in a 529 plan and now your child is a year away from college saying he or she wants to go through the pearly gates of “expensive!”

Regardless of where your child would like to go to college or where you as the parent would like your child go to college, there is one fact that remains the same — how much you as a parent are able to contribute. Parents ask me all the time, how much should I save for college? I turn around and say how much would you like to contribute? Once they tell me, I say, “Let’s see if that is possible.”

There are many ways to pay for college. Start with how much you have to contribute, investigate your options for scholarships, grants, student loans, work study programs and financial aid, then pick a school you can afford.

If you want more information on college funding, there are many site to help you research 529 plans or you should reach out to a professional like a fee-only financial planner.