Financial Literacy

Once upon a time, in a not-so-distant past, the phrase "working your way through college" wasn't just a quaint expression - it was a reality for many students. In the 1960s and 1970s, a diligent student could cover their tuition and fees with earnings from a part-time job and a summer gig. Fast-forward to today and that same scenario sounds like financial science fiction.

Even in the 1980s, students working 15 hours a week during the school year and full-time over the summer at minimum wage could still cover their tuition at a public four-year college. Today, that same work schedule would barely cover a third of the average in-state tuition and fees, let alone room, board, and the ever-growing list of additional expenses. This stark contrast paints a vivid picture of the challenge facing today's families as they plan for higher education costs.

College costs have steadily risen over the years, often outpacing inflation and household income growth. For parents, this means that saving for their child's education is more important than ever. Based on historical trends and economic forecasts, by 2033, in-state tuition at public four-year colleges could reach between $15,000 and $18,000 per year. Private college costs could exceed $60,000 annually for tuition and fees alone.

Whether your child is a newborn or entering high school, understanding the savings options can help you prepare for one of the most significant expenses many families face.

Hidden or Often Overlooked Costs

When planning for college, many families focus solely on tuition and fees. However, many additional expenses can significantly impact the overall cost of higher education. Travel to and from school, books, supplies, and even health insurance may add substantially to the overall cost.

Living expenses constitute another significant category of often underestimated costs. Whether living on-campus or off, students need to budget for housing, meals, transportation, and personal expenses. In some urban areas or at universities with limited housing options, these costs can rival or even exceed tuition expenses

But what about financial aid?

When discussing college costs, financial aid often arises as a potential solution - and it frequently is. However, the term "financial aid" can be confusing, and families may harbor misconceptions about what it truly entails.

Financial aid is often divided into two categories: gift aid and loans. Gift aid, such as scholarships and grants, typically doesn't need to be repaid -around 60% of all financial aid is gift aid. Loans, on the other hand, must be repaid with interest.

Even with most financial aid comprised of scholarships and grants, gift aid isn't sufficient to pay the entire cost of college. For example, the average student loan debt for a four-year degree is around $30,000 - and that doesn't include education loans taken out by parents.

Further, just because a large portion of all financial aid doesn't need to be repaid doesn't mean that your family will qualify for it. Financial aid is complex, with variables ranging from family income to the amount of institutional aid provided by the school to select students. As a result, it's challenging to know exactly how much college will cost for your child.

The Importance of Early Planning

Rather than simply hoping everything works out, many families create a college savings strategy. Thanks to the power of compound interest, the earlier you start saving, the more time your money has to grow. Even small, regular contributions can add up significantly, given a long enough time horizon.

Early planning also provides more flexibility in college choice. A robust savings plan allows your child to consider schools that might otherwise be financially out of reach. This expanded range of options can be crucial in finding the best fit for your child's educational and career goals.

This week, we'll explore many ways families can save for higher education. From college savings accounts to pre-paid tuition plans to understanding the potential impact of college savings on financial aid, we'll outline the tools you need to get started.

We'll also look at another potentially overlooked concept - balancing helping your kids with the cost of college versus saving for your financial future. Tapping retirement savings or home equity may work for some families. Still, it's essential to understand the pros and cons before making decisions that may impact your future self.

The Takeaway

The rising trend in tuition and fees, combined with often overlooked expenses and the uncertainty of gift-based financial aid, makes it clear that many families should consider a comprehensive approach to college savings. Early planning remains the most effective strategy for managing these costs.

Let's get started!

When it comes to saving for your child's college education, the array of account types available can seem as confusing as a student's first week on campus. Let's explore the two most common types of college savings accounts and the pros and cons of each. We'll also look at a lesser-known way to save for education and retirement expenses.

529 Plans: The Overachiever of College Savings

A 529 Plan is one of the most popular and flexible options for saving for college. Named after Section 529 of the Internal Revenue Code, these plans allow you to contribute money that grows tax-free, and withdrawals used for qualified education expenses are also tax-free. There are two main types of 529 Plans:

• Education Savings Plans - These plans work like an investment account, allowing you to invest in mutual and exchange-traded funds. The value of your account can grow or shrink depending on the performance of the investments you choose. The money in these plans can be used to pay for tuition, fees, books, supplies, and even room and board at any eligible institution.

• Prepaid Tuition Plans - These plans allow you to prepay for tuition at current rates for in-state public colleges. The primary benefit is that you lock in today's tuition rates and avoid future increases. However, these plans usually only cover tuition and fees and may limit where the funds can be used - typically only at participating in-state institutions.

Pros of 529 Plans

• Tax-free growth and withdrawals for qualified expenses.
• High contribution limits - typically between $235,000 to $529,000 per student depending on the state.
• Flexibility to change beneficiaries within the same family.
• They can be used for a wide range of educational institutions.
• Some states offer additional tax deductions or credits for contributions.

Cons of 529 Plans

• Non-qualified withdrawals are subject to taxes, a 10% federal penalty on earnings, and potential state penalties.
• Prepaid tuition plans often have limited investment choices.
• The potential reduction of need-based financial aid since assets held in 529 Plans are considered parental assets for financial aid purposes (though they have a relatively small impact).

Using Both Plans Together

There are no federal restrictions on enrolling in both types of 529 Plans simultaneously, so it's possible to contribute to an education savings plan and a prepaid tuition plan for the same student. Especially if the prepaid tuition option suits your family, the ability to lock in today's tuition while investing to cover other costs offers excellent benefits.

Using both types together also offers more flexibility. For example, even if your child decides to attend a school not covered by tuition prepayment, you would still have the education savings plan to help cover college costs. Then, the funds in the prepaid plan could be transferred to the education savings plan or another beneficiary.

That said, it's crucial to thoroughly review your prepaid tuition plan's specific terms and conditions, as the rules can vary significantly between different state plans and private institutions.

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts, or ESAs, are another college saving option. Like 529 Plans, they offer tax-free growth and withdrawals when the funds are used for qualified education expenses. However, Coverdell ESAs are more restrictive regarding contribution limits and eligibility requirements.

A significant advantage of Coverdell ESAs is that they can be used for both K-12 and higher education costs. This option makes them a good choice for families who want the flexibility to cover private school tuition, other K-12 educational costs, and college savings.

Pros of Coverdell ESAs

• Tax-free growth and withdrawals for qualified expenses.
• Can be used for a broad range of educational expenses, including K-12.
• More investment flexibility than many 529 Plans.

Cons of Coverdell ESAs

• A contribution limit of $2,000 per year per student.
• Income limits for contributors mean plan eligibility is phased out at certain income levels.
• Funds must be used by the time the beneficiary reaches age 30, or taxes and penalties may be applied to any remaining funds.

The Roth IRA Alternative

Although primarily designed for retirement, Roth IRAs can be a flexible option for college savings. When used to pay for a child's qualified education expenses:

• Contributions can be withdrawn tax-free and penalty-free at any time.
• Roth IRAs are not considered assets for financial aid purposes.
• Earnings (the gains from your contributions over time) can be withdrawn tax-free and penalty-free after the account has been open for at least five years and the account owner is at least 59 1/2 years old.

Traditional IRAs also allow for penalty-fee withdrawals of contributions for qualified educational expenses, but the amount you withdraw is subject to income tax and will be reported on your student's FAFSA for the next school year.

Remember, while IRAs can be used for educational expenses, their primary purpose is retirement savings. It's crucial to balance short-term educational needs with your long-term retirement goals. Please consider speaking with a financial advisor before reallocating retirement funds to cover the cost of your child's education.

The Takeaway

529 Plans and Coverdell ESAs are excellent options for families who want to save for college and maximize potential financial aid eligibility. They're simple to set up and 529 Plans may offer additional benefits depending on your state's rules.

Regardless of your child's age, there's always time to enhance your college savings strategy. Whether you're just starting with a newborn or facing the imminent reality of college with a high schooler, there are effective strategies you can start using today to help pay for college.

From leveraging the power of compound interest in the early years to maximizing scholarships in high school, each age brings unique opportunities to better prepare for higher education costs. So let's explore savings strategies tailored to different stages of your child's life - from infancy to high school - so you can stay on track no matter when you begin.

When Your Child Is Young (0-5 Years)

College may seem like a distant concern when your child is still in diapers, but this is actually the best time to start saving. The key advantage at this stage is time. For example, if you start saving $200 per month when your child is born and earn an average 6% annual return, you could have over $70,000 by the time they're 18.

• Open Tax-Advantaged Accounts - Consider opening a 529 Plan or a Coverdell ESA to start putting away money as soon as possible. When withdrawn for qualified education expenses, these accounts allow your savings to grow tax-free. Some states also offer tax deductions for 529 contributions.

• Automate Contributions - Set up automatic monthly contributions to a college savings account, even if it's a small amount. Automating the process ensures that you're consistently saving without having to think about it every month.

• Leverage Gift Contributions - Encourage family members, such as grandparents, to contribute to your child's college savings fund instead of buying toys or clothes for birthdays and holidays. Many 529 Plans allow third parties to contribute directly, making it easy for loved ones to help build your child's education fund.

• Consider a Growth Focus - At this early stage, most experts suggest an investment strategy that emphasizes growth. Since you have many years before the funds will be needed, you can afford to take on more risk by investing in stocks and equity-based funds, which have historically offered higher returns over the long term.

Elementary and Middle School Years

As your child enters elementary school, you still have a long runway to save for college. Still, you may need to adjust your strategy to account for other financial priorities during this phase, such as school expenses, extracurricular activities, or saving for different financial goals.

• Increase Contributions When Possible - If your income has increased since your child was born, now is an excellent time to boost your contributions to their college savings account. Even a modest monthly increase can significantly impact your total savings over time.

• Take Advantage of Tax Benefits - Contributions to certain college savings accounts, like 529 Plans, may be eligible for state tax deductions or credits. Research your state's rules to maximize your savings and tax benefits.

• Reassess Your Investment Allocation - While your approach may continue to focus on growth overall, you may want to begin gradually shifting your investment portfolio toward a slightly more balanced mix. For example, you might move some of your investments into bond funds or other less volatile options to protect against potential market downturns.

• Monitor Your Progress - Regularly review your savings progress to ensure you're on track to meet your goals. Use online calculators to estimate how much your current savings will grow and whether you'll need to increase your contributions to stay on target.

• Consider Prepaid Tuition Plans - Some states offer prepaid tuition plans that allow you to lock in tuition rates at current prices at select schools. Research whether this option is available in your state and may suit your child's likely college choice.

Last-Minute Saving Tips for High School Parents

By the time your child enters high school, college is just around the corner. While the window for aggressive growth investments has narrowed, you can still implement strategies to maximize your savings and prepare for upcoming expenses.

• Consider Conservative Investments - As college approaches, shifting a larger portion of your savings into conservative, stable investments such as bonds or money market funds may be wise. This reallocation reduces the risk of losing a significant portion of your savings to market volatility right before you need the funds.

• Look for Scholarship Opportunities - Scholarships can significantly "boost" your college savings by reducing the cost of school. Encourage your child to apply for scholarships - ideally before their senior year.

• Explore Dual Enrollment and AP Courses - If your child is still in high school, explore options such as dual enrollment or Advanced Placement (AP) courses that allow students to earn college credits while still in high school. These credits can work to ensure that your student graduates in four years or, for students attending community college, may directly reduce the cost of their degree.

• Consider Part-Time Work - If your child is old enough, encourage them to take on a part-time job during high school. The earnings can be used to cover expenses that would otherwise draw from your savings, such as application fees, testing fees, or even a portion of college tuition.

• Max Out Tax-Advantaged Accounts - If you're approaching the end of your college savings window, consider maxing out any remaining contributions to your 529 Plan or Coverdell ESA. This step allows you to take full advantage of tax benefits before your child heads off to college.

The Takeaway

By following these age-based strategies, you can build a solid financial foundation for your child's education, regardless of when or how they choose to pursue it. Remember, every family's situation is unique, so don't hesitate to consult with a financial advisor to create a personalized college savings plan that works best for you.

What would you choose: funding your child's college education or your own retirement? Or paying off high-interest debt? Or saving for a new home?

These are questions no parent wants to face, yet many do. In an ideal world, we'd achieve all our financial goals simultaneously. But in reality, limited resources force us to make tough choices. How do we prioritize securing our children's future and managing other financial priorities? Is it possible to strike a balance?

There's no one-size-fits-all answer. Most parents want to provide the best possible opportunities for their children, but parents also have financial needs and obligations. The challenge lies in finding a balance that addresses multiple goals without sacrificing one.

So, let's take a look at a few strategies that may help you achieve all of your important financial goals.

The Percentage Allocation Method

This strategy involves allocating a specific percentage of your savings to different goals. For example:

• 60% to retirement
• 20% to college savings
• 10% to an emergency fund
• 10% to other long-term goals

This approach ensures you're making progress on multiple fronts simultaneously. Adjust the percentages based on your specific situation and priorities.

Action Step: Assess your current financial situation and set realistic percentage allocations for each financial goal.

The Retirement-First Approach

Contrary to parental instinct, prioritizing your retirement savings over college savings is not selfish. Here's why:

• The power of compound interest takes time, making early retirement contributions extremely valuable.
• A secure retirement reduces the likelihood that you'll need financial support from your children later in life.
• Many retirement accounts, like 401(k)s, offer employer matches – essentially free money.

To adopt this approach, consider maxing out your retirement contributions before allocating funds to college savings. Once you contribute the maximum, redirect additional income to college savings.

Action Item: Calculate your retirement needs and maximize your 401(k) or IRA contributions before allocating funds to college savings.

Leveraging Tax-Advantaged Accounts

Make the most of accounts that offer tax benefits for both retirement and college savings:

• Maximize contributions to retirement accounts like 401(k)s and IRAs.
• Utilize 529 plans for college savings, which offer tax-free growth and withdrawals for qualified education expenses.
• Consider a Roth IRA, which can serve double duty - primarily for retirement, but you can also withdraw contributions at any time without penalty for qualified education expenses if needed. If the account owner is at least 59 1/2, the contributions and earnings can be withdrawn for any reason without taxes or penalties.

Action Step: Research the tax-advantaged accounts available and open the appropriate accounts for your goals.

The Debt Snowball and College Savings

If you have high-interest debt, consider using the debt snowball method to pay it off quickly. Once the debt is cleared, redirect a percentage of those payments to college savings.

Here's how the debt snowball debt plan typically works:

1. List all debts from smallest to largest, regardless of interest rate.
2. Make minimum payments on all debts except the smallest.
3. Put any extra money towards the smallest debt.
4. Once the smallest debt is paid off, apply its payment to the next smallest debt.
5. Repeat until all debts are paid off.

While the traditional debt snowball focuses solely on debt repayment, you can modify this approach to include college savings:

1. Start with the basic debt snowball method.
2. Once you've paid off a debt, allocate a portion to college savings instead of applying the entire freed-up amount to the next debt. For example, if you've been paying $300 monthly towards a now-paid-off debt, you might apply $250 to the next debt and $50 to college savings.
3. As you pay off each debt, reallocate the money spent on the repaid debt to increase your remaining debt payments and college savings contributions.

This strategy recognizes that while debt repayment is essential, neglecting other financial goals (like college savings) until you're debt-free may not be the most balanced approach for everyone.

While the debt snowball isn't the least expensive way to pay off debt (prioritizing debts by interest rate saves the most overall), the tiered approach may offer more motivation since you're actively increasing college savings contributions with the "savings" you gain from reducing debt.

Action Step: List your debts and create a repayment plan that incorporates gradual increases in college savings contributions.

Creating a Plan

Remember, the ultimate aim isn't just to save for college, but to do so in a way that maintains your overall financial health and supports your family's long-term financial security. Steps to consider when making a plan that's right for your family include:

1. Assess your current financial situation: List all your assets, debts, and financial goals.
2. Prioritize your goals: Decide which financial objectives are most crucial for your family.
3. Open necessary accounts: Set up retirement accounts, college savings plans, and emergency funds as needed.
4. Create a budget: Allocate specific amounts or percentages to each financial goal.
5. Set up automatic contributions: Automate your savings to ensure consistent progress toward your goals.

As you probably know, life is unpredictable. So, your financial strategy should be flexible enough to adapt to changing circumstances. Regular reviews and adjustments of your plan are crucial.

Action Step: Set a recurring calendar reminder to review and adjust your financial strategy every six months.

The Takeaway

By understanding our options and developing a strategic approach, it may be possible to create a plan that addresses multiple financial goals simultaneously. Balancing college savings with other priorities is less about finding a perfect formula and more about finding an approach that works for your family.

But when you find a balance that works, remember it isn't static. Adjust your plan for promotions, new family members, unexpected windfalls, or setbacks. The key is to remain flexible and attentive, ready to fine-tune your strategy as needed.

Saving for a child's college education is one of many parents' most significant financial goals. You may have heard that the USDA estimates that raising a child today costs just over $300,000. Well, those figures don't include the cost of higher education.

So let's explore how to maximize your college savings with tax advantages, investing, and the importance of rebalancing your savings portfolio as your child approaches college age.

Compounding: The Superhero of Saving

Would you rather have one million dollars or a magical penny that doubles in value for 30 days? Assuming you don't mind waiting 30 days, you'd actually have more than a million dollars with the magical penny.

This fact illustrates the power of compound interest, one of the most powerful tools for maximizing college savings. When interest compounds, it starts to grow on both your original investment and the returns you earn along the way. For example, if you invest $5,000 when your child is born and contribute $200 monthly with an average annual return of 8%, you could have nearly $120,000 when your child turns 18 - around 2.5 times your original investment.

The key to making the most of any savings plan is to start early. Even if you can only save a small amount initially, the power of compound interest over time can significantly boost your savings.

Tax-Advantaged Savings

The college savings example above does not include taxes on the interest. If you're in the 25% tax bracket, your savings total wouldn't be nearly $120,000 - it would be closer to $92,000. So how can you keep the entire $120,000?

A tax-advantaged approach is one of the most effective ways to maximize your college savings. This way, your savings grow tax-free, and there's no tax payable at withdrawal when used for "qualified education expenses" like books and tuition.

Tax-advantaged savings options include:

• 529 Plans - These are state-sponsored investment accounts, and some states offer additional tax deductions or credits for contributions.
• Coverdell Education Savings Accounts (ESAs) - These plans have a lower contribution limit of $2,000 per year but provide more investment flexibility.
• Roth IRAs - Though primarily retirement accounts, Roth IRA contributions can be used for educational expenses without penalty.
• Savings Bonds - Series EE and I Savings Bonds offer tax advantages when used for education, though income limits do apply.

Using tax-advantaged options such as these allows your money to work harder for your child's education - potentially saving thousands of dollars that would have gone toward income taxes.

Choosing Investments Within College Savings Accounts

Once you've selected a savings method, it's crucial to choose suitable investments within that account. Unless you invest in savings bonds or choose investments like money market funds, investments in stocks, bonds, and associated mutual funds do involve risk to your principal investment.

Here are some guidelines for understanding and managing risk when saving for college:

• Risk Tolerance - Consider your risk tolerance and time horizon. For example, you may choose higher-risk/higher-reward investments early and move toward lower-risk investments as your child approaches college age.

• Diversification - Spread your investments across different asset classes (stocks, bonds, cash) to manage risk that's appropriate for your risk tolerance.

• Low-Cost Options - Look for low-cost investment options, such as index funds or ETFs, to maximize your returns. Low-cost funds have an expense ratio of 0.50% or lower.

• Age-Based Portfolios - Many 529 plans offer age-based portfolios that automatically adjust the asset allocation as your child approaches college age.

• Individual Stocks and Bonds - If you're using a self-directed account, you might consider individual stocks or bonds, but be aware that this requires more active management and potentially carries more risk.

Remember, the right investment strategy depends on your circumstances, risk tolerance, and goals. Consider consulting with a financial advisor to create a personalized investment plan.

Rebalancing Investments as Your Child Approaches College Age

As your child gets closer to college age, it's important to adjust your investment strategy to protect your accumulated savings. This process is called rebalancing.

As your child nears college age, you have less time to recover from potential market downturns. Rebalancing helps reduce risk and preserve the value of your savings. This process involves gradually shifting your investments from higher-risk options (like stocks) to lower-risk options (like bonds and cash). This process typically begins when your child is in middle school and continues through high school, depending on your risk tolerance.

For a hands-off approach, many 529 plans offer age-based portfolios that automatically rebalance for you. This option can be convenient, but note the expense ratio of those options versus a do-it-yourself approach.

Maximizing Contributions

To truly maximize your college savings, consider these additional strategies:

• Set Up Automatic Contributions - Regular, automatic deposits can help you stay consistent with your savings goals.

• Increase Contributions Over Time - As your income grows, try to increase your contributions accordingly.

• Use Windfalls Wisely - Consider allocating a portion of tax refunds, bonuses, or gifts to your college savings fund.

• Encourage Family Contributions - Instead of toys or clothes, suggest that family members contribute to your child's college fund for birthdays or holidays.

• Explore Employer Benefits - Some employers offer matching contributions to 529 plans or other education savings benefits. Take full advantage of these if they are available to you.

The Takeaway

By implementing these and other strategies, understanding the power of compound interest, choosing suitable investments, and rebalancing over time, you can maximize your college savings and be better prepared for the significant expense of higher education.

Remember, every dollar saved is a dollar (plus interest) that won't need to be borrowed in the future, potentially minimizing or even avoiding the burden of student loan debt.

When saving for college, many parents worry about how their savings will affect their child's eligibility for financial aid. The reality is that the type of savings account you choose and how much you save can influence the need-based financial aid your child receives.

However, the good news is that savings for college are typically treated favorably in the financial aid formula. Let's explore how different college savings vehicles impact financial aid eligibility and offer strategies to optimize your savings while minimizing the effect on need-based financial aid.

Understanding Need-Based Financial Aid

In this article, we're specifically discussing college saving's impact on need-based financial aid. This type of financial aid is awarded based on demonstrated financial need. It can include grants that don't need to be repaid and subsidized student loans (in which the interest on the loan balance doesn't begin to grow while in school and certain other circumstances). Different types of financial aid can be awarded regardless of a student's financial need.

Before being concerned about saving's impact on need-based aid, consider whether or not your family would even qualify for need-based aid. Determining eligibility can be complex since aid eligibility is based not only on income (and assets in some cases) but also on the number of children in school simultaneously. Schools that award significant institutional aid may also calculate financial need differently compared to the federal formula.

But in general, it's not uncommon for middle-class families (especially those in higher-cost-of-living areas) to find that they aren't eligible for any federal need-based aid. However, schools that offer significant institutional aid may have higher income limits.

To get a rough estimate of your need-based aid eligibility, consider using the Net Price Calculator, which virtually all schools offer on their financial aid websites. These calculators ask for specific financial details (no registration is required) and provide a rough estimate of the aid you can expect. This website's College Explorer tool also offers an estimate of prices paid based on family income based on federal data.

The FAFSA and Financial Aid Calculations

The Free Application for Federal Student Aid (FAFSA) is the primary tool colleges and the federal government use to determine a student's eligibility for need-based financial aid. It calculates a Student Aid Index (SAI) based on a family's income, assets, and other factors. This figure is the amount your family is expected to contribute toward paying for college.

How different savings vehicles are reported on the FAFSA can have varying impacts on the aid your child may receive. Here's an overview:

529 Plans

One of the most common college savings vehicles, 529 Plans are typically treated as a parental asset on the FAFSA if the parent owns the account. Parental assets are assessed at a maximum rate of 5.64%, meaning only a small portion of the account's value is considered when calculating the SAI. This relatively low impact makes 529 Plans an attractive option for college savings.

Coverdell Education Savings Accounts (ESAs)

Like 529 Plans, Coverdell ESAs are treated as a parental asset if the parent is the account owner. These accounts are also assessed at the 5.64% rate, which makes their impact on financial aid similar to that of a 529 Plan. The key difference is that Coverdell ESAs have lower contribution limits and can be used for K-12 expenses in addition to college expenses.

Student-Owned Assets

If the student directly owns savings accounts, investments, or other assets, these will be counted as student assets on the FAFSA. These assets are assessed at the 20% rate, which can substantially increase the SAI and decrease eligibility for need-based aid. In other words, every $1,000 in student assets reduces aid eligibility by $200 in that school year. Then, 20% of the remaining student assets would be the expected contribution in the following year and so on for the student's time in school.

CSS Profile and Institutional Aid

Some colleges, particularly private institutions and schools with significant institutional aid, use the CSS Profile in addition to the FAFSA to determine financial aid eligibility. The CSS Profile takes a more comprehensive view of a family's financial situation, which may include home equity, retirement savings, and other assets that may not be considered on the FAFSA. This difference means that the impact of college savings on institutional financial aid could vary more widely depending on the school.

If your child may attend an institution that requires the CSS Profile form, contact the institution's financial office to explore its specific policies. Note that these policies, however, are subject to change.

Strategies to Optimize Aid Eligibility

Even though college savings can reduce the need-based aid your child qualifies for, careful planning can minimize the impact. Here are some strategies to optimize aid eligibility while still building a robust college savings fund:

• Prioritize Parent-Owned Accounts - Since parental assets are assessed much lower than student assets, keeping college savings in accounts owned by the parent is generally advantageous.

• Minimize Student-Owned Assets - Avoid placing large sums of money in student-owned accounts, as these are more heavily penalized in the financial aid calculation. If your child has substantial savings in their name, consider using those funds for immediate expenses or transferring them to a parent-owned account if possible.

• Spend Down Student Assets - Before your child applies for financial aid, consider spending down any assets in their name on qualified expenses such as books, computers, or even prepaying part of their tuition. This step can help reduce the impact of student-owned assets on the FAFSA.

• Maximize IRA Contributions - Since retirement accounts are not reported on the FAFSA, maximizing contributions to these accounts can be a way to save for college while not impacting aid eligibility. Roth accounts allow for penalty-free and tax-free withdrawals for qualified educational expenses (at any time for contributions and after the first five years for earnings). Traditional IRAs do allow for penalty-fee withdrawals for qualified educational expenses, but the amount you withdraw is subject to income tax.

The Takeaway

Remember, the goal is not to "game the system" but to make informed decisions that balance college savings with potential financial aid eligibility. Every family's situation is unique, and what works best for one may not be ideal for another. Consider consulting with a financial advisor or college funding specialist to develop a strategy that best fits your family's needs and goals.