Quirks about Getting Education Loans Even with a 529 College Plan

Parents who are considering investing in a 529 college savings plan should be aware that there are some quirky rules about college savings, college loans, financial aid and parental financing for college that could impact the child’s ability to pay for college and should plan their financial investments accordingly.

Parents who are trying to figure out how to maximize their college investments for their child without losing money to some of the quirky college loan rules should be aware of several different factors that affect a child’s financial aid eligibility when applying for college.

When considering which type of 529 college savings plan to invest in, parents should keep in mind that some of the quirky rules about 529 plans and college loans that could cause confusion in the future and may even work against the student by limiting or reducing the amount of financial aid they are eligible to receive from the college or university they want to attend.

Pre-paid 529 plans can be tricky when it comes to taking out college loans in addition to having a pre-paid plan. Because pre-paid plans are paid to the school the money that is pre-paid is considered, for the purposes of financial aid, to be scholarship money and the student’s “need” figure is reduced by the amount of the pre-payment.

So while the pre-paid 529 account was set up to keep tuition costs low, it can mean that the student’s financial aid will be significantly lower than it would be without the pre-paid plan meaning that large college loans at high interest rates will be necessary to make up the shortfall in tuition costs.

Since eligibility for Federal college loans that have low interest rates and flexible repayment terms is based on both financial aid and need, having a pre-paid 529 means that most students and parents won’t qualify for the Federal college loans and will have to take out private loans from banks or other lenders that may not have interest rates that are as low or reasonable repayment terms.

While parents think they are doing the right thing investing in a pre-paid 529 college savings plan they may be doing more harm than good by using a pre-paid 529 plan to save for their child’s future college education.

Keep as much money as possible in the parents’ name. Money that is set aside in the child’s name, even in a 529 account, will directly impact the amount of financial aid that the student is eligible for. A student with a large amount of money in his or her name will not qualify for much financial aid, or large student loans, so keeping the investment in the parents’ name is the best way to invest money for college.

Parents’ contributions to the student’s education are considered when making financial aid decisions but not to the same extent as the amount of money that student has available for college that is in their own name. So in order to make sure that the child receives as much financial aid from the school as possible, keep the investment in the parents’ name, not the child’s.

Parents can expect some reduction in the amount of financial aid offered to their child if they have a 529 account, but it will be only a moderate reduction compared to the drastic reduction in financial aid that would occur if the 529 account was in the child’s name.

When planning for a child’s future it’s important to be aware of all the rules regarding college savings plans and how those investments might affect the child’s financial aid eligibility in the future. It’s always a smart idea to plan ahead for a child’s college education but make sure that the investments will help the child and not their chance at getting a high quality college education in the future.

Keeping Track of your 529 College Plan Contributions

There are several reasons that it’s important to keep track of your 529 college plan contributions. When investing in a pre-paid 529 college plan account overpayment means money that parents won’t be able to withdraw or to use if the student doesn’t need it or ends up not going to college.

When investing in a non pre-paid 529 college savings account it’s important to keep track of your investment contributions because that money may be subject to an income tax deduction in the state you live in.

This is important for any family member who is contributing to the child’s 529 college savings fund, and anyone in the family can contribute money to the college savings fund although the contribution may not be tax deductible in all states.

Keeping track of your contributions to a child’s 529 college savings account is also important so that you can keep track of how much money has been invested, if the investment is growing fast enough and what the rate of growth is. After all, that account is very important to the family because the child’s future education depends on it.

The money that parents or other family members contribute to a 529 college savings account is considered to be a gift and as a gift that money qualifies in the tax code as part of the annual $11,000 gift tax exclusion. So, any family member can contribute up to $11,000 annually without any taxes being applied to that money.

According to the current Federal gift tax law, parents and family members can give up to five years' worth of financial gifts, so a total of $55,000, in one year with no tax penalties, however that person would not be able to contribute any money to the account for four years following that year.

Making a large contribution makes a lot of sense whenever a parent or family member can afford it because the interest on such a large payment would accrue faster and in greater amounts than interest on smaller payments, even if there were lots of smaller payments made during the year.

If you have a personal banker or investment professional who takes care of the household’s investments make sure that the investment professional gives you a detailed accounting of all the contributions made to the non pre-paid 529 college savings account every quarter or every month and keeps you advised of important matters pertaining to the account.

The best way to make sure the investment is doing well is to monitor it yourself, but many people find investing confusing and prefer to leave their investments to be managed by a professional.

When tax time comes around, be sure to document all your contributions to the child’s 529 college savings program if your state allows tax deductions on that money to make sure that those deductions are applied to your taxes.

Keeping track of your 529 college plan contributions also means staying on top of the latest developments in the laws regarding 529 college savings plans. Make sure to stay on top of any changes in the laws regarding 529 college plans to make sure that you don’t end up losing money.

While a non pre-paid 529 college savings plan has a relatively moderate risk level, there is still some risk and it’s best to monitor the contributions and management of the 529 college savings plan closely to make sure that the investment is still performing well and growing under the asset company’s management.

Be sure to address any questions about the contributions to or the performance of the 529 college savings account to the asset management company chosen by the state to administer the account rather than to the state itself because the state is not involved in the direct management of the 529 college savings fund.

Why Consider Out of State 529 Plans?

Why go out of state to shop for a 529 plan? Should you be considering other options? Let’s face it, not all state 529 plans are created equally. It is recommended that investors look at their home-state plans as a first option.

Some states have great incentives such as state tax deductions on contributions and matching grants. A poor 529 plan may wipe out the benefits such as deductions and grants. Look for a state tax deduction calculator on-line to determine the value of the benefits.

Make sure you find the plan with the lowest fees. Take a look at the Utah Educational Savings Plan Trust. With this plan you will find nine tried and true index and international offerings from Vanguard with a charge of only 0.38% per year for it’s most expensive option. You can compare this to Nebraska’s AIM College Savings Plan that has a heavier price of 1.35% to 1.61% with traditionally weaker funds.

Conservative investors should be aware of how much their state plans put into the stock market. The Michigan Education Savings Program is a good choice for the cautious investor. The plan even has a savings option, with no annual fee, that guarantees a minimum yearly interest rate and principal based on a Treasury note index. This plan also has portfolios of TIAA-CREF mutual funds that are more like bond funds than other 529 plans.

Look and see if your state 529 plan has the best portfolios of underlying funds. Compare it to plans like the Maryland College Investment Plan. They use a great blend of funds from T. Rowe Price. And the plan’s most expensive option costs just 0.98% annually.

Some people prefer to build their own portfolios. Look for a state that has a good mix of investment choices. For example, the College Savings Plan of Nebraska offers a selection of 20 funds including Vanguard, American Century and Fidelity funds.

In 2006, Kansas, Maine, and Pennsylvania all passed “tax parity” laws. This means that tax deductions are extended on contributions to residents who have invested in 529 plans from other states. This is unlike the other states that only extend state tax breaks to those who selected in-state plans. This tax parity law allows more flexibility to investors to select investments more suited to their wants and needs.

Look for a 5 Cap 529 program. States are rated on a scale of one to five. A 5 Cap program meets high standards in program flexibility, liquidity and availability of assets, strong ownership rights, state benefits, investment approach and safety, and program resources.

Three plans that have 5 Cap ratings and have been rated among the best 529 plans are the Maryland College Investment Plan, the Utah Educational Savings Plan and the Virginia College America Plan. Check them out to see how they compare to the plan in your home state.

All savings and prepaid plans are transferable to out-of state and private institutions. There will be no penalty if you have an out of state 529 plan if your child attends a local college. Your child will still be eligible for in-state tuition in the home state. They will still pay the lower tuition for Iowa students if you use the Nebraska plan.

It’s not advisable to flutter among 529 plans from state to state. Do your research or talk with a financial advisor. Pick the plan that makes the most sense for your family. Your state may very well have the plan that works best so why consider out of state 529 plans? Because it’s your money and you need to make sure it’s working hard for you!

What the $12k Gift Tax Exclusion is All about in Terms of 529 Plans

When you get ready to save for college, whether you are saving for your own child or for a grandchild, there are many possibilities for you to consider. Will need shear it gets more and more expensive to fund a college education. Because of this many people are looking into starting college education funds from the time of their child or grandchild is very young.

One of the more popular ways to save for college is the 529 plan that allows you to put money back for college now and lock in today's savings. Another reason why the 529 plan is so popular is because of the $12k tax exclusion. This tax exclusion allows anybody to give to a 529 plan tax-free, as long as it does not exceed $12,000. Here is a closer look at the 529 college savings and this gift tax exclusion.

There are many reasons why the 529 plans are so popular today. These types of plans encourage people to save now for their child's future college expenses. This plan is also known as the qualified tuition plan and is sponsored by state colleges and universities and are fully endorsed in authorized by the Internal Revenue Service.

There are essentially two different types of 529 college savings plans. One is the prepaid tuition plan, and one is the college savings plan. All 50 states support these plans, and all public colleges and universities are required to take the 529 college savings plan. There are even a small group of private colleges and universities that will accept this plan as well.

The prepaid 529 plan is quite popular because it is accepted in all states at public universities and colleges in locks in college tuition fees at today's costs. The money saved using the 529 plan covers all costs associated with attending college, including room board books and other necessities.

Many family members like to contrary to the 529 college savings plans for a variety of reasons. One of these reasons is because they can give this money to the recipient and save on taxes. You have got to $12,000 as the gift tax exclusion is applied to your gift. All contributions to a 529 college savings plan are completely exempt from the estate taxes and gift taxes.

If the certain specifications and criteria are met. For example, a parent who owns an account for their child can make a lump sum contribution of up to $60,000 for each of their children when they did this.

They can avoid incurring a taxable gift on this amount. This is a great way to save money for college without being double tax in the end. Nobody wants to have their child go to the frustration of having to pay taxes on a lump sum of money that they have intended to use as college.

In addition is also important to remember that the 529 college savings plan is also popular because it is safe from bankruptcy, should it occur. Almost everyone can open a 529 plan based on their financial situation, because most of these plans offer a wide variety of saving options.

The best way to get detailed information about the 529 savings plan is to consult your account or financial advisor or find information on the Internet before deciding to use a 529 plan were before you decide to use the $12,000 gift tax exclusion you should understand how these plans were and how it will affect your income.

When you have children, and you want them to attend college, why wait until it's too late to save for college? Learn more about the 529 college savings plan today and start saving now.

Switching from your UTMA/UGMA to a 529 Plan

Should you consider switching from your UTMA/UGMA to a 529 plan? This is technically possible but be aware, there are some pitfalls. Before looking at this question, it may be useful to be refreshed on the account basics.

The Uniform Transfers to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA) is a type of custodial account for children. These uniform acts have been adopted by most states as a way to transfer ownership of property to your children. Both UTMA and UGMA provide for similar account features.

In a nutshell, these Acts allow you to fund an account for “little Suzie”, but will limit the access of the account to her until she is of age, typically 18-21 years depending upon where you live. She is the actual owner of the account, but you are the custodian. You will control the account until Suzie is no longer a minor. Then the custodial relationship ends and she will take control.

All gifts put into a UTMA/UGMA account are permanent gifts to your child who is the beneficiary of the account. Once money is placed in the account, you can make fund withdrawals only for items that benefit your child.

Some examples of these items could be private school fees, a computer, books, piano lessons, a learning camp, school transportation and other items as such. Legally this is the child’s money. Thus, if custodial money is transferred to a 529 plan, that ownership is supposed to be maintained.

Since the money in your UTMA/UGMA fund needs to be used for the benefit of your child, it means it is possible make an investment into a 529 plan. The 529 plans must be established for the same child.

You can’t take the money from “little Suzie’s” plan and put it into a new plan for “Little Bill”. Different plans handle the switching from your UTMA/UGMA to a 529 plan in a couple of different ways. Either the minor child becomes the owner as well as the beneficiary or you remain the owner, but there may be restrictions on future changes to the beneficiary.

In accordance with federal law, only cash can be contributed to a 529 savings plan. This means that all of your current investments in the UTMA/UGMA account need to be converted to cash if the have been placed in real estate, stocks and such. Keep in mind that making these transfers will usually be a taxable event.

Perhaps a better idea would be to “spend down” the custodial account on items that you would have purchased for your child anyway. Items purchased need to be for the benefit of the child. Also items cannot be a normal parental expense such as food and shelter.

It’s been said that you can revisit your spending history and reimburse yourself for things like private school fees, summer camp, music lessons and such. Then you would take the money you’re reimbursed and make an equal contribution into the 529 plan.

If you do decide to go ahead and make a direct transfer into a 529, it may be a good idea to keep the new funds in a separate account and not mix them with other 529 funds. You are still bound by the rules of the UTMA/UGMA accounts.

This means that you cannot change the beneficiary and you must turn over control of the 529 plans when your child comes of age. All future gifts to the switched plan will be treated like UGMA/UTMA contributions and they are considered permanent gifts to the child. Consider these ideas when switching your UTMA/UGMA to a 529 plan.

More Than One Kid – Why Two 529 Plans are Better Than One

Going to college is an expensive affair, and it looks like you can expect the cost of a college education to keep going up and up. However, it is becoming ever more important for young people entering the workforce to have a Bachelor’s degree, at the least under their belt.

For that reason, skipping the expense of a college education is just not practical for most. While college may be one expense you can’t spare for your kids, it doesn’t have to send you to the poor house.

There are an increasing number of savings plans and grant programs available to families who need help financing a college education, and one of the newest, yet increasingly popular, of these plans is a 529 savings plan.

These savings plans give families a tax break on the money they put aside for their children’s education, plus, they also help families maximize their savings potential by investing their money in higher interest stocks and bonds. A 529 savings plan can be a great way to send your kids to college without ending up deep in debt.

The tax break you get on a 529 savings account is federal, but the account itself is a state based program. The requirements, benefits, and costs of 529 savings accounts are determined on the state level, and they vary from state to state, so while some states may have several 529 savings plan options, allowing you to spread out your money and decide how much risk you are willing to take on your 520 savings contributions, other states have just one plan.

529 savings accounts work in two different ways. Some are straight savings accounts, in which you make deposits on a regular basis, and when your child reaches college age, they can withdraw and either spend on an in state public university institution for a discount, or they can take to their dream school.

Other 520 savings plans are actually pre-payment payment plans. These plans are tied to specific schools, and so your child must attend that college to get the benefits of that money. If they choose to not go to school, or to go to a different school, all of the money may be lost, depending on the specific rules for that account.

While you’re deciding which type of 529 savings accounts you need, if you have more than one child, there is another decision you need to make – should you have a separate savings plan for each child. Experts are split on this topic. The general consensus is that, in theory, one account is plenty for both children.

There are benefits to spreading your money out a little bit, though. If your children are clearly headed for different types of colleges, than you start two different accounts that are geared towards each of those institutions.

Spreading your money out minimizes the risk of choosing a bad savings plan; it gives you some back up if one of your account bottoms out due to bad investments. If your children are not close together in age, then spreading out their college savings plans lets you save more effectively for each child.

For instance, you may need more aggressive investments and higher returns if you are just starting to save for a high school age child, but you may want to take your time and be a little more cautious building a plan for a pre-school age child. All in, you may be limited in your decision making by your state’s 529 plan laws, but saving individually for your individual children may pay dividends in the long run.

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