Saving for your child’s college isn’t an easy endeavor. It is increasingly expensive, which can make it challenging to cover even a portion of the total, much less the entire cost. This is why the best strategy is to start saving early. However, for those who are starting later, there are still financial planning opportunities to help support your savings goals.
Early-Stage Planning: The Benefits of Saving Early & the Best Ways to Save
The earlier you begin saving for college for your child, the more flexibility you have in terms of available options and smart strategies. First and foremost, we suggest setting your child’s expectations regarding how much assistance you plan to provide. Discussing these details early will allow you (and them) the time to research alternative sources of college funding like loans, grants, and scholarships, in addition to exploring less expensive routes, such as starting with community college or selecting a trade school.
California 529 Accounts & the Impact of Compound Interest
Assuming your goal is to save as much as possible for your child’s education, saving early in a 529 account is an excellent strategy when planning for college because of the profound impact of compound interest. California 529 accounts function much like a Roth IRA with higher contribution limits. While you put dollars in that have already been taxed, your investments grow tax-free and can be withdrawn tax-free if they’re used for qualified educational expenses.
Additional Benefits of 529 Accounts
- Accounts can be front-loaded with up to five years’ worth of contributions ($80,000 per contributor).
- Contributions reduce the donor’s estate without giving control of the funds to the child (unless you want to).
- Assets receive favorable financial aid treatment, with grandparent-owned 529s being the most favored.
- Each state sponsors its own 529 plan, which does not limit you to selecting a college in your state, with most states offering an income tax deduction for contributions to the home state’s plan (although California is an exception).
- The account can be transferred to a sibling (or other family member) if the child doesn’t end up going to college or using all funds.
Alternatives to 529 Accounts: The UTMA & Earmarking
If you would like the flexibility to utilize these monies on expenses other than education, the UTMA (Uniform Transfer to Minors Act) account may be a better fit. Although, UTMAs don’t have to be used for educational expenses, they are considered an irrevocable gift to the minor and have to be used for their benefit. While the donor will maintain control of the assets on behalf of the minor, once they reach 18 or 21 (depending on your state), the child will gain full access to the account. It is important to note that, UTMA assets receive the harshest treatment for financial aid consideration and are less tax efficient than a 529. However, similarly to a 529 plan, contributions reduce the donor’s estate.
Another option, is to simply earmark the funds you plan to use in an account under your name. Earmarking gives you the most flexibility since you retain control of the assets indefinitely. While this method receives favorable financial aid treatment (though not as favorable as a grandparent-owned 529), earmarking receives no tax advantages while it grows and does not reduce your taxable estate in any way.
Mid to Late-Stage Planning: Saving for College on a Shorter Timeline
You’re not alone if you find yourself with a pre-teen or even a teenager and limited college savings. If you’re just starting to save money at this point, a 529 account is still a solid option. But because they are more effective when starting the saving process early, simply earmarking the funds in an account in your name probably makes the most sense for students heading to school sooner rather than later.
If you have some savings at this point, take the time to ensure that your savings will sustain your child for the duration of their education while applying for additional funds through financial aid.
As you approach this major milestone, it is even more important to set clear expectations with your child, working together to create a plan you can all stand behind. Whether you’re starting now or well on your way to substantial savings, it is unwise to use your retirement accounts to fund your child’s college education.
Federal Funds, Family Contributions, & Planning Calculators
When the time comes, everyone should be filling out the FAFSA (Free Application for Federal Student Aid). Even if your child doesn’t qualify for grants, they may qualify for inexpensive federal loans. Additionally, many private schools require the FAFSA to be filed before they will offer institutional aid packages (even those that are merit-based).
How EFC is Calculated
To determine what you will be expected to pay out of pocket annually, use an online Expected Family Contribution (EFC) calculator. All public universities and some private schools use FAFSA’s EFC formula. The EFC calculator should give you a good baseline of what your expected costs will be, though schools are under no obligation to cover your entire financial need—and most won’t. Additionally, 200+ private institutions use the CSS Profile for calculating your EFC. Individual institutions can customize their data points and weightings for the CSS Profile calculation, but the two biggest differences between how EFC is calculated are that the CSS Profile considers home equity and small business assets, whereas FAFSA does not. This could make all the difference in your college planning.
Generally speaking, if your EFC is low, then the colleges that will offer the best need-based financial aid packages are elite private universities. They will often cover the student’s entire financial need with scholarships and grants.
If your EFC is high, merit-based aid is often easiest to earn from non-research private universities and universities with religious affiliations. Ultimately, your child might need to take out loans to bridge the gap. Be aware that despite often being listed on an institution’s Award Letter, Parent PLUS loans aren’t necessarily an award. They often have large borrowing limits (beyond what any lender would typically loan) and can compromise a parent’s financial security and retirement.
Net Price College Calculators & Graduation Rates
Before completing applications, check each school’s net price college calculator, an additional resource providing a personal estimate of what a family will pay for one year of college, accounting for potential need and merit-based aid the institution will offer based on the student’s circumstances. However, not all net price college calculators are required to be comprehensive. If you find yourself answering a short list of generic questions that don’t dive deeply into your financial situation, it probably won’t be accurate. The longer the questionnaire, the more meaningful the output will be.
The quicker your child gets out of college, the less they need to pay, which is why we always factor four-year graduation rates into the equation. They vary wildly between individual institutions, with a 33% average four-year graduation rate at public universities and a 53% average four-year graduation rate at private universities.
Financial Planning for College Key Takeaways
Though we don’t offer a la carte college savings services, they are included for all of our wealth management clients. Our team of experts in financial planning for college is eager to help set your student up for success—connect with us today to learn more about working with Whelan Financial.
- Start saving early.
- Set expectations with your child(ren).
- Utilize 529 accounts or be smart about alternatives.
- Determine how much you need to save each month. (The Vanguard College Savings Planner is a helpful resource.)
- Apply for federal aid regardless of your situation.
- Research need- and merit-based aid packages from the institutions themselves.
- Look for net price calculators with in-depth, comprehensive assessments.
- Explore all avenues—including scholarships, grants, loans, and types of schools.
