When to start saving for college.
Planning for retirement and planning for college have many things in common:
- It pays to plan ahead
- The costs can vary widely
- There can be surprises along the way
- Saving early is one of the most important strategies
Once you are on track for retirement, you may want to start saving for college for a child or grandchild. Choosing a school that matches the student and the budget is an important part of planning. Consider the number of years it takes to graduate, potential scholarships, internships, etc. The 529 plan and the Coverdell Education Savings Account (ESA) are 2 tax-advantaged options.
The 529 and ESA accounts have many similarities, but they each have unique features. Some of the main differences include account ownership, custodian broker, contribution amounts and the investment choices.
A 529 account is opened through a state sponsored program (you need not to be a resident of the state). 529 plan features vary widely among the states and careful review is important when choosing one.
Planning for Financial Aid
If the student is eligible for financial aid, ownership and distribution strategies should be considered. For example, a 529 account owned by a grandparent is not considered an asset on the Free Application for Federal Student Aid (FAFSA), but distributions for qualified expenses will count as income to the student. There are strategies to manage this.
However, if the 529 account is owned by the parent, it will be included in the parent’s assets when applying for financial aid, but the distributions are ignored.
Planning ahead to coordinate all resources will help make the most of the financial aid available.
While the college savings are growing, consider:
- Researching Scholarships, Grants and Financial Aid (other than loans).
- Taking college credit classes in high school.
- Using a local Community College for the first 2 years. The California College Promise program offers help with tuition and other services in the first year. Look for other, similar programs.
- Using student loans prudently. The Federal Stafford loans to the student have the lowest interest rate at 5.05%. The Federal PLUS loan for parents are 7.6% interest. Private loans vary widely. Calculate the future cost and how it will impact future finances of the borrower.
A little knowledge can go a long way when it comes to successfully managing your finances. When you are confidently in control of your money, you can start enjoying your life instead of just saving for it.
Make sure your money is working as hard as you are.