Magellan Financial, Inc.
Asset & Wealth Management in Allentown, Pa
College Savings Plans
College Savings: From Getting Started to Enrollment
Our wealth advisory team can help optimize your financial life
Many parents (and grandparents!) start saving for college when they find out they are starting a family. Others get a late start for a multitude of reasons. This article is intended to provide a guide regardless of where you may be in your young student’s financial journey. From birth through college enrollment, there are always actions you can take to help your son or daughter prepare for their first significant investment.
We explain the nuts and bolts of college costs, what you can expect in the years ahead, and outline a couple of options for handling college savings and the cost of attendance when the time comes. This guide is meant as an introduction to college savings. As always, turn to a financial professional for advanced planning insights tailored to your and your family’s unique goals and needs.
Set the Foundation for College Savings
Many people we work with come to our office with the right intentions for their young children but haven’t quite ironed out their other financial priorities. For example, you may think retirement is still decades away but the power of compounding makes saving in your 30s and 40s the most crucial time to save for your golden years. All things being equal, you may be better off saving for your future first, as there are many ways to help your kids pay off student loans later.
Once you have a plan to get your own financial house in order, we usually start by asking clients a series of questions to help them get started with the college planning process:
- How sure are you that college will be suitable for your child?
- What is their natural aptitude, and what do they want to study in school?
- Do they want to attend a private or public college, and what is the expected cost?
- Can you reasonably expect an athletic, academic, or need-based scholarship?
- Is there anyone else who will be helping defray costs (i.e., grandparents, etc.)?
These are a few questions that help frame the parameters of the conversation. Usually, parents know fairly early if their son or daughter is a high flyer destined for the best education money can buy. Similarly, do you know that your child wants to be a teacher? Public colleges in your area probably specialize in training educators and would provide a more focused learning experience at a more reasonable cost.
What’s the Sticker Price for College?
While college costs increased over 7% annually from 1980 to 2005, tuition costs have only risen roughly 2% annually in recent years. Part of that change stems from lower inflation rates, but the slowdown also reflects a more careful appraisal of the value college provides. That said, it’s a safe assumption that college costs will continue to outpace inflation, and that assumption guides much of our college planning with our clients.
Next, it’s essential to consider that tuition is only one piece of the college puzzle. Cost calculators for higher education use the cost-of-attendance (COA) to detail not only tuition but also books, fees, room, board, transportation, and even healthcare for an academic year. This delivers a figure that amounts to a particular school’s “sticker price” – or the maximum amount you can expect to pay. Many of these costs are optional; however, living on- or off-campus will significantly impact room and board costs. To get an accurate expectation of what you can expect to pay, we need to get granular and tailor the planning process to what your family can expect to contribute to college costs.
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Expected Contribution for College
To get a handle on what you’ll pay, you’ll first have your child submit the Free Application for Federal Student Aid (FAFSA) in the fall of their senior year of high school. If that idea seems overwhelming, make sure you bookmark our popular article, which provides tips on how to fill out the FAFSA to guide you through the process. Schools will look at the info you submitted on the FAFSA – primarily your family’s income and assets relative to size – to determine your child’s expected family contribution.
This expected family contribution has been relabeled in recent years as the Student Aid Index, or SAI. This is the number that colleges use to determine how much federal student aid a student is eligible for. It’s also the starting point for many colleges to determine institutional aid amounts. The US Department of Education also maintains a great net price tool that allows you to predict what you may need to contribute based on other students in similar financial situations applying to that same school.
One of the questions we get repeatedly is how a student’s savings will impact financial expectations. The current methodology assesses a more significant penalty to student assets (20%) than parental assets (5.64%) when calculating expected family contribution. With few exceptions, this calculation holds regardless of the savings vehicle chosen. To continue the above calculation with an example, $10,000 in the student’s name would add $2,000 to the expected contribution for the freshman year of college. In contrast, that same $10,000 in an account in your name might add $564. Here, we can see that student assets have a more significant impact on expected contribution.
Two Paths to Saving: Taxable Accounts and 529 Plans
The upside of saving in a taxable account is the added flexibility – the flexibility should your child decide college is not for them. Money saved in a brokerage account has various investment options and can be used to meet multiple financial goals. Contrast this with 529 (college-specific savings plans), where any money used for non-educational purposes can be subject to a 10% penalty. If you are uncertain or want added flexibility, a taxable account can be a viable option in your financial toolbox.
However, You should remember that brokerage accounts lack the tax advantages of 529 plans. You make contributions with post-tax money (like a Roth IRA), but the contribution growth becomes tax-free if used for a qualified education expense. Many states, such as Pennsylvania, also maintain tax incentives whereby investment in a state-held 529 plan provides a deduction from state income taxes. This money can still be used for college anywhere in the United States.
A 529 plan also maintains some features that make it more flexible than you might think. If your son or daughter does get a scholarship, you can withdraw dollar-for-dollar from the 529 plan for non-educational purposes without a tax penalty. Moreover, 529 plans can be used for graduate school or even passed on to your grandchildren by changing the beneficiary name.
Finally, a new provision allows unused 529 plan funds to be rolled over into a Roth IRA, providing an added benefit for savers. This rollover option applies to the beneficiary of the 529 plan, allowing up to $35,000 to be transferred over their lifetime. The funds must be in the 529 plan for at least 15 years, and the rollover is subject to annual Roth IRA contribution limits. This change offers greater flexibility, allowing families to use leftover 529 savings for retirement instead of facing penalties for non-educational withdrawals, making it a valuable tool for long-term investment planning.
*Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.
*Wells Fargo Advisors Financial Network does not provide legal or tax advice.
Pulling It All Together
A child’s education is often the key to his or her future. Whether your child has big aspirations and you want to contribute more, or you simply want to lessen the burden on your child in the future, Magellan Financial offers a variety of plans that can help fit both you and your child’s needs. For more information regarding college savings plans, investment planning, or financial aid, please contact Magellan Financial today!
Contact Magellan Financial
Interested in learning more about how Magellan Financial can help you save for college? Contact our team of Financial Advisors today!