Important Steps to Take when Saving for College

It’s time to look at some important steps to take when saving for college. The time to save is right now. It’s never too late to state a plan. Consider these tips for education savings.

Step 1. Start early. The sooner you start saving, the less you’ll need to save each year to reach your goal. The day your child arrives is not too soon to begin saving! You can take advantage of investments that promise greater returns. You can take advantage of volatile investments that are too risky for short-term college savings.

Step 2. Set up a budget. You should make a savings goal. Look at the Internet for a college cost calculator to get a rough idea of what you need to save. Then figure out how much you can put away each month to reach this goal.

Step 3. Save regularly. Get into the habit of investing a set amount of money monthly. This will set the habit of education future planning. Not a good saver? Have an automatic payroll deduction made or an automatic deposit withdrawn. This way the money is out of your checking account before you can use it.

Step 4. Use professional assistance. That’s what they’re there for. Unless you are a financial wizard yourself, talk with an experienced accountant, financial advisor or lawyer. Ask what they are doing for their children. It helps to know that your advisor can personally relate to your college savings strategy.

Step 5. Think about a 529 plan. Even if you haven’t started saving as early as you had planned a 529 plan or even a Coverdell ESA are still useful. The 529 plans offer many tax advantages. Your money will actually grow in a tax-deferred style and if your withdrawals are qualified, they will be exempt from federal income tax. Many states even give tax deductions from state income tax. Check with your state’s 529 provider for more details.

Step 6. Save in the parent or guardian’s name, not the child’s. This minimizes the impact of the fund on need-based financial aid. Also, this will prevent an irresponsible child from using their education savings fund or 529 for non-qualified purchases.

Step 7. Diversify your investments. For example it is better to invest in mutual funds than just stocks. Mutual funds spread out the risk over many stocks, which can prevent the drop in value of one stock from ruining the value of your whole portfolio. Or invest in both stocks and bonds. A good plan would be to have a mix of high and low risk investments.

An age-based 529 savings plan is a simple way to balance your portfolio. Younger children have a higher percentage of high-risk investments than older children. As children are just a few years from college, an age-based 529 plan would have almost all funds invested in low risk investments.

Step 8. Be flexible. A great new college program may be available just a few short years from now. Tax laws will change and your income circumstances may change, too. Review the steps you’re taking from time to time and be willing to make adjustments.

If you find that the assumptions behind your investment plan are not correct or your tolerance for risk has changed, you may need to change your investments. Don’t sell an investment just because the market is low; sell because of how the investment is predicted to do in the future.

There are so many important steps to take when saving for college. Any money you are able to tuck away today makes the road to college that much smoother for your child.

States that Come Close to the 5-Cap Rating with 529 Plans

As your looking at plans, it’s a good idea to know about the states that come close to 5-cap rating with 529 plans. Let’s face it, the smartest thing you can do is pick the very best plans for your money. Ratings are assigned to each states program ranging from 1-cap (not very attractive) to 5-caps.

The cap system is based upon opinion and is not a formula. Different people might weigh these items differently. Case in point, some plans have different age requirements that affect their ratings. If your child meets these age requirements, this would be a non-issue.

The cap rating system prefers 529 plans that are flexible. You want a plan that easy rolls over to other state plans with no penalties and gives you freedom to change beneficiaries. It’s best to be able to have high maximums and low minimums with wide eligibility for owners and beneficiaries.

When it comes to liquidity and availability, you want to be able to use the account immediately for college expenses. It needs to be easy to deposit and withdraw from the account. Also, the ability to take out monies for items other than education without the account being closed is important.

To score high caps, the owner should be in control of the account. This means their ownership rights include being able to transfer ownership at any time and be able to name a new beneficiary in case of death.

The states that score the most caps back up their programs with additional state level benefits. In these states, there are things like state tax deductions for contributions and exemption for college used earnings. You may find exclusion of 529 accounts when you are applying for state financial aid. And of course, some states offer some great extra perks like loan programs and matching grants.

Another important scoring point is the state’s approach to investments and safety. The name of the game is lots of choices. It’s great to find well-designed investment plans and high rated portfolios. Low fees and expenses as well as age-based discounts on pre-paid tuition are key. The 5-cap states guarantee of pre-paid tuition contracts and downside investment protection.

Program resources need to have thorough and complete program materials including web site access. Having a call center is not enough; you need people there that are excited and knowledgeable about 529 plans. Finally, the cap ratings prefer successful efforts to gain favor from the IRS regarding status as a 529 plan.

The 5-cap rating is not based solely on historical returns. It does not predict the risk levels or predict future investment performance or how solvent the program funds are. This is just a measure of how useful the state’s 529 plan is based on the discussed factors.

The 5-cap programs offer great flexibility, attractive investments and benefits such as state tax breaks. These factors can add volume to your savings. In the 5-cap program, you will find very few weaknesses. Even a program rated 3-cap offers some very good benefits but may have some concerns that you need to research.

Now that you are refreshed on the positive aspects of the 5-cap rating, which states come close? The eight having plans for residents that are rated 5-cap are Alaska, Maryland, Michigan, Ohio, Rhode Island, South Carolina, Utah and Virginia.

Honorable mention should go to the 4-½ cap states of Colorado, Connecticut, District of Columbia, Georgia, Illinois, Indiana, Iowa, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont West Virginia and Wisconsin. Now that you know which states come close to the 5-cap rating with 529 plans, perhaps you can invest with just a bit more wisdom.

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.

Overall Benefits of the 529 College Savings Plan

Saving for college can be scary. There are so many options available, and this can make it hard to choose which plan is best for you. One of the best ways to determine which type is right for you is to compare the benefits of each. One of the most popular plans is the 529 savings plan, and this plan offers many benefits. Just a few of the many benefits achieved by people who invest in the 529-college savings plan include the following:

You get to save with pretax dollars. This is the top reason for investing in any college fund, and it can save a bundle over the long-term.

You have options. Since there are two types of plans, you get to pick the best way to invest your money. You can either buy tuition credit (which allows you to purchase college time for the future at today’s prices), or it can be a simple savings set up for college. This type of 529-college savings plan is based on many types of investments—largely mutual funds.

There are more opportunities for additional funds. This includes the potential for matching scholarship and grants that you only have access to through your 529 plan.

Creditors cannot touch the funds. Unlike other types of investments or savings accounts, a 529-college savings plan is untouchable by creditors, which ensures that your child will be able to use this money for college no matter what.

During financial aid calculations, this account is not included. If you were to invest the exact same amount of money in a traditional savings account or another investment tool, it is included as part of your assets or earnings. However, the 529 plan is not, which means you have access to more financial assistance for funds.

The beneficiary does not have to stay the same. One of the biggest fears when investing in college fund accounts is that the intended child will not want to go to college when they get old enough. This is why the 529 plan allows the beneficiary to change whenever the need arises. You can switch the funds to one of your other children or even a relative who needs the money for college.

Each individual state operates its own plan. This means that it has protection from federal taxes, as well as state income and asset taxes. This also allows you to choose which state you want to invest in, but most of the time; the plan will offer added incentives for you to invest in your own state’s program.

The account does not limit where the child must attend school. There are over 8,000 schools in the United States that will allow use from these funds, so your child will still have options when it comes to which school they want to attend.

You retain control of the funds. Unlike some types of college investments, such as bonds, your child does not gain control at any age, allowing you to use the money where you see fit. This includes tuition, books, dorm fees, and more.

It allow for all income levels. There are low minimums required as monthly deposits, so virtually anyone can afford to contribute to this type of account.

As you can see, there are many benefits of the 529-college savings plan. By using a program with this many benefits, you will be able to save your child’s future education while enjoying the tax benefits in the present too. Since so many people cannot afford to live only for the future, this is one of the most prominent benefits of all.

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