The future of financing undergraduate college tuition payments may not be as simple as a savings account and a student loan anymore.
As the price of higher education continues to creep higher, parents and families need to incorporate a new range of concepts -- no longer just saving for college but saving smarter. Let's look at some key strategies and consider some fresh ideas. We're in search of new muscle to move the millstone when it comes to college savings (and financial aid).
Beyond the basics: leveraging savings with new tools
Time was, college-bound students simply started a savings account to tuck away cash for tuition. This evolved with the advent of the 529 plan, a tax-advantaged tool that allows families to either prepay tuition or save up for college costs while avoiding federal, and often state, taxes. So long as you observed the rules and anticipated fees and expenses, all of this worked fairly well.
But there have been developments surrounding the concept of saving for school, and there are now even more creative ways to add to your future-classroom funds.
- Social networking: One new idea in the college savings milieu is the savings social-networking program. These programs allow family and friends to contribute to a college savings account. Milestones make the process something like a game: Your student gets an "A" in high-school algebra, and everybody deposits $50 to the savings account. See GradeFund for one example of a network that doesn't charge a fee per contribution. Some do, however, and they tend to run in the 5% range.
- Cash-back deals: Similar to the way airlines offer frequent-flier miles for using their branded credit cards, companies such as Upromise, operated under the same umbrella as Sallie Mae, have created plans that contribute to your 529 plan all the rebates you accrue by purchasing merchandise via their website. Refund rates range from 1% to 10%, depending on the vendor or product on which you spend (and there are ways to double dip, if the merchant is also offering cash back). There's also a credit card option from Upromise, and some financial institutions -- Fidelity's 529 College Rewards American Express Card is one example -- offer a college-related cash-back card as well.
It's not enough to build up your savings with the latest tools, however. You also need to learn the ins and outs of how to use that money in ways that preserve your edge in the income-sensitive world of financial aid.
Balancing the benefits of savings and financial aid
Timing can be everything when it comes to maximizing the savings you've put away for college.
And timing plays into how savings of different kinds can impact your student's financial-aid eligibility. There's little sense in crippling your chances at the free federal application because you took a distribution at the wrong moment.
- The 529 effect: An issue can arise when college tuition contributions come from a 529 owned by someone other than the student or the parent. Think of this as the "grandparent equation." While that external account typically won't be reported as an asset on the Free Application for Student Aid, or FAFSA, any distributions from the account while your student is in college are counted as untaxed income to the enrollee. That can cut into aid eligibility -- up to half of the given amount. One work-around to this effect is to take the distribution from the 529 after your student's senior-year FAFSA is filed. Then you have the savings account money available to pay school-related fees without penalties -- which you'd have to pay if you waited until after graduation to take the distribution -- but the money won't count against financial-aid eligibility while the student's still in school.
- Other kinds of savings: It's not just the 529 that can impact students in this way. Roth IRAs, for example -- whether owned by the student or the parent -- can have a similar effect on the FAFSA. Tax-free returns of contributions taken from a Roth account can tilt eligibility by as much as half the untaxed distribution taken while the student is still in school. A work-around to this is to take student loans -- noting that the government pays the interest during enrollment -- and then use the distribution after graduation to pay down the student-loan debt.
From new networks to cash-back instruments to timing your distributions in order to maximize what a FAFSA can do for you, use this toolbox of tips to start your planning. Much like careful attention to your college savings, these can absolutely add to your student's bright future.
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James O'Brien is a contributor to WiserAdvisor.