Tips about Saving for College (from
www.fastweb.com -
http://www.fastweb.com/nfs/fastweb/static/PDFs/Financial_Aid_Wisdom.pdf)
College costs double every decade and triple in the 17 years from birth to college enrollment.
It is cheaper to save than to borrow. If you save $200 a month for 10 years at 6.8% interest, you will accumulate $34,433. If instead of saving, you borrow $34,433 at 6.8% interest with a 10-year repayment term, you will pay $396 a month, almost twice as much.
Time is your greatest asset. Start saving for college as soon as possible. If you start saving at birth, about a third of the college savings goal will come from interest on the contributions. If you wait until your child enters high school, less than 10% will come from interest.
It is never too late to start saving. Every dollar you save is about a dollar less you will have to borrow. Every dollar you borrow will cost you about two dollars by the time you repay the debt. The one-third rule: Plan on saving a third of projected college costs or the full 4-year costs the year the baby was born. Like most life-cycle expenses, college costs will be spread out over time, with about one third coming from past income (savings), about one third from current income and financial aid, and about one third from future income (loans). Since college costs increase by about a factor of three over any 17-year period and 3 x 1/3 = 1, that suggests that your college savings goal should be the full 4-year cost of college the year the baby was born.
You might not be able to predict which college your child will attend, but you probably can predict the type of college, such as an in-state public 4-year college, out-of-state public 4-year college or a non-profit 4-year college. For a baby born in 2012, this means saving $250/month, $400/month and $500/month,
respectively, from birth to college enrollment.
Save in the parent’s name, not the student’s, as this will reduce the impact on eligibility for need-based financial aid. A dependent student’s 529 college savings plan is treated as
though it were a parent asset.
College savings may count against you in the need analysis formulas, but the penalty for saving is minimal. Less than 4% of dependent students have any contribution from parent assets in the calculation of the expected family contribution. The need analysis formula shelters many parent assets, including retirement plans, the net worth of the principal place of residence and small businesses owned and controlled by the
family. There is also an asset protection allowance based on the age of the older parent that typically shelters about $50,000 in parent assets. The remaining assets are assessed on a bracketed scale, with a top bracket of 5.64%. So every $10,000 saved in a 529 college savings plan will reduce need-based aid by at most
$564. That leaves the family with $9,436 to pay for college costs. Families who save for college have more options than families who don't save.
When choosing a 529 college savings plan, choose the plan with the lowest fees. This will maximize your savings. You can invest in any state’s plan. Likewise, choose the direct-sold version instead of the advisor-sold version, since the fees are lower. If the fees are similar, choose your own state’s plan if it offers a
state income tax deduction on contributions to the state’s plan.
Pay yourself first. Before spending your paycheck, set aside some money for your children’s college savings. The best way to do this is by making saving automatic, so you don’t have to take any extra steps each month to save. Set up an automatic monthly transfer from your checking account or paycheck to the college savings plan. You will quickly get used to having a less money to spend. Start saving what you can, and gradually
increase it, especially when a regular expense like diapers or day care ends. Redirect at least half of windfalls, like income tax refunds and inheritances, to college savings.
Distributions from non-reportable assets, such as a grandparent-owned 529 college savings plan or a tax-free return of contributions from Roth IRA, count as income to the beneficiary. This can have a severe impact on financial aid eligibility. Rather than take a return of contributions from a Roth IRA when it can hurt eligibility for need-based financial aid, wait until after the financial aid applications are filed for the senior year to take the return of capital to pay down debt.
-Ms. Miller-Pecora
