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How America Pays for College

collegecosts How America pays for college has a direct impact on individuals, families and society now and in the future. According to a recent study by Sallie Mae, about half of all parents surveyed do not save for college.  Of those who do, less than 30% use a 529 Savings Plan as an option.

When parents or grandparents are saving, they may be using accounts that are not necessarily dedicated to college savings. They’ll use a passbook savings account or checking account.  Some will use multiple accounts including Coverdell Education Savings Accounts, UTMA or UGMA accounts as well as child life insurance policies.

The vast majority of folks think that saving for college isn’t for them for a number of reasons.  These include such reasons as limited discretionary cash to invest, lack of knowledge about the options and strong belief that athletic or academic scholarships will be sufficient.

Unlike most any other investment or savings vehicle, only 529 Plans offer the opportunity to accumulate savings and eventually withdraw it tax-free if used for qualified educational expenses. Too often, parents and grandparents have the misconception that a 529 Plan is not the right choice for their student.

But a 529 Plan makes sense regardless of the ‘type’ of student and can be an effective part of an ‘all-of-the-above’ college funding strategy.

And it makes sense for families regardless of their financial situation.

Planning for College Improves Outcomes

Like any other journey, when you have a map you’ll probably feel more confident and less anxious about the trip.  The same can be said for a financial journey like paying for college.  In the same Sallie Mae study, more than 40% of parents have starting planning for college which includes investigating college costs, savings options, scholarship searches and understanding how financial aid works.

By a whopping 69% to 25%, parents who plan feel more confident about meeting the college funding challenge than those who don’t. Non-planners tend to believe disproportionately that the greater share of college funds will be coming from scholarships and grants.

Parents who have a plan tend to have more saved (average of $18,000+) compared to non-planning parents (around $10,000) and will have a saving target set versus the non-planners.

And the best way to create a plan is to work with someone who can layout a time line and strategy that you can use like a GPS for your college funding challenge.

5 Student Types Benefit with 529 Plans

Athletes

Most dads feel that Junior will be the next big thing on the grid iron or baseball diamond. So, naturally, their athletically gifted little one will be getting that coveted athletic scholarship. The reality is that about 2% of high school students receive NCAA scholarships and the average is under $2,000. So even if your student receives an award, you need a way to fill in the large gap to cover the costs.

Scholars

Academically gifted students may expect to receive merit or scholarship awards.  But given that the average elite school costs upwards of $60,000 per year, the reality for many is that merit awards will not cover the entire amount. Even if your gifted child does score a big award, it may not cover things like fees, labs and boarding costs. So here a 529 Plan will help fill in this gap as it can be tapped to pay for such items.

Legacies (aka The Fortunate Ones)

Many grandparents want to leave a legacy and help out their grandchildren.  Here a 529 Plan can help with this in a structured way that also can do double-duty as an estate planning tool.  And in this case the funds held in 529 Plans owned by a grandparent will not be counted as an assessable asset so won’t hurt the child’s chances to qualify for needs-based financial aid.

Budget-Conscious

Although students of modest personal and family means may think that college savings will hurt their chances for aid, the reality is that financial aid formulas mainly focus on income.  And for assets – such as a 529 Plan – held in a parent’s name  the impact is nominal since the accounts are assessed at a rate of 5.64% to determine the Expected Family Contribution (EFC).  Saving in a 529 Plan will have a much lower impact on the all-important EFC than assets held in the name of the student. And since withdrawals can be done tax-free for qualified education expenses, this means that it is more efficient than for parents or students to save outside of a plan.  Not only are you going to be assessed for the asset, you’d also need to have saved more to counter the tax-favored status of the 529. And the more you have saved means you’ll need less in the way of loans later.

Non-Traditional Students or Vocational Careers

College isn’t for everyone.  There are a number of careers that require vocational training or certifications without need for a bachelor’s or associate’s degree.

In fact, the best way to save on college is to avoid spending on it needlessly.  Far too many folks go to school without a plan for a career or job in mind.  Before you incur loans that need to be repaid and can never be discharged through a bankruptcy, do a career assessment using tools like the Birkman Method or Naviance available through a qualified college planner.

Whether you are going on to post-secondary school right out of high school or coming back to school from the work force as part of a career transition, you’ll find that having that extra savings in a 529 Plan will help.