get in early with college savings programs

Get in Early With College Savings Programs

A college degree can give your child a significant advantage when entering the job market. However, rising tuition costs are causing financial challenges for many families.

The average cost of college is around $35,000 a year, including tuition, living expenses, and other costs. With the cost of a four-year degree reaching $140,000, a college education requires careful financial planning.

Start by using the right savings programs and begin them as early as possible. Financial planning tools will help you secure a better future for your child who could earn a little over $50,000 a year after graduating with a college degree.

How to pay for college

Families are turning to savings and investment products like 529 plans to finance their child’s college education.

Saving for college with a 529 plan

A 529 plan is a specialized savings account that allows you to put money aside to cover qualifying educational expenses, namely K–12 or college tuition.

Parents are typically the account owners, and the child is the beneficiary. The structure is similar to Roth IRAs with contributions made with after-tax dollars and tax-free distributions. Plus, a majority of states offer tax credits or deductions on your contributions.

Saving with a 529 plan is a popular option because these plans have low fees and require little maintenance. A plan manager makes investment decisions on your behalf to help grow your account balance as you keep contributing to your nest egg. The downside is that there are no self-directed investment options.

These plans have no contribution limits. Relatives and close friends can contribute, and the only rule is that the IRS will consider contributions as completed gifts with an annual gift tax exclusion up to $16,000.

Plus, a 529 plan will have a limited effect on your child’s eligibility for financial aid. When filing out their FAFSA application, students have to report their assets as well as their parents’ assets to obtain an Expected Family Contribution (EFC) index. A high index score reduces their eligibility for a Pell Grant of up to $6,895 a year and up to $12,500 in federal student loans.

Student assets can increase the EFC by 20% of their value. On the other hand, parental assets only increase this index by up to 5.64% of their value. Because parents are typically the owners of the 529 plan; financial planning product has a lesser impact on eligibility for financial aid.

Are state prepaid plans a good option?

Unfortunately, state prepaid plans are only available in nine states: Florida, Maryland, Massachusetts, Mississippi, Michigan, Texas, Washington, Nevada, and Pennsylvania.

These plans aren’t an investment product. Instead, they let you get a locked-in tuition rate and pay for your child’s education in advance. Your child will have to attend an in-state institution, but you can save thousands, especially if you open a plan for a young child.

The downside of a state prepaid plan is that you’re not investing your money, which means your balance will only grow through recurring or lump-sum contributions. There are also restrictions regarding the age of your child and the duration of the contributions that can vary from one state to another.

How much assistance will your child get?

Your child can apply for need-based assistance through the Free Application for Federal Student Aid, or FAFSA, process. This application covers different forms of aid, including federal grants, work-study programs, and loans.

Private loans are another common option, and a student at a public institution will borrow around $30,000 on average to graduate with a bachelor’s.

Merit-based scholarships can help offset the cost of a college education, and students can qualify regardless of assets based on their grades and accomplishments. This site is a great place to start for finding scholarships your child could apply to.

Leverage your home equity to pay for college

Amid a strong real estate market, a growing number of parents are opting for refinancing their home to finance their child’s education. Rising home prices can turn your home into a valuable asset that you can leverage to secure a better future for your child.

First Centennial Mortgage can help you explore this possibility. Get in touch with us to learn more!

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