Strategies for Successful College Planning
Five insights for achieving college funding goals
UNDERSTAND THE COSTS
KNOW WHAT TO EXPECT FROM FINANCIAL AID
1 Finaid.org. Based on full-time students at four-year colleges.
2 Sallie Mae, How America Saves for College, 2016.
3 Sallie Mae, How America Pays for College, 2017.
4 U.S. Department of Education, 2017.
Don’t let financial aid stop you from investing
It’s a common myth that investing for college will hurt your chances for financial aid. The fact is, family income counts much more than assets in the formula for awarding federal aid.
This chart shows an example of the dollar amounts used to determine federal financial aid eligibility. In calculating the Expected Family Contribution, the Department of Education considers up to 47% of parents’ income but only a maximum of 5.64% of their assets — even those in a 529 plan earmarked specifically for college.4
DON’T JUST SAVE, INVEST
Put the power of compounding to work for you
The sooner you start and the longer you invest, the more time your college fund may have to compound and grow in value.
For example, if you start contributing $500 a month when your child is born instead of waiting until age 6, you would accumulate nearly $87,000 more. That’s the power of compounding.
Make college investing part of your monthly budget
Think of your college fund as another monthly bill. You can supplement your monthly investments by also contributing part of pay raises, bonuses, tax refunds and other extra money. Every small addition could make a big difference over time.
1Sallie Mae, How America Saves for College, 2016.
Don’t count on cash
More than 60% of college savers use savings accounts that earn minimal interest.1 Cash has historically underperformed tuition inflation. Instead of just saving, investing that cash gives families the higher return potential needed to grow college funds and keep pace with rising costs.
Invest in a diversified portfolio
The key to staying invested for the long term is avoiding large portfolio fluctuations over the short term. Because stocks and bonds tend to rise and fall at different times, owning both may help you smooth out investment returns and stay on course toward college funding goals.
This chart shows that a diversified portfolio has historically outpaced bond returns and tuition inflation, with lower volatility than stocks.
KEEP COLLEGE AND RETIREMENT ACCOUNTS SEPARATE
Avoid using retirement funds for college
Withdrawing money for college can jeopardize your retirement security. For example, this chart shows that taking out $25,000 to fund college now could mean $80,000 less for retirement in 20 years, due to lost investment earnings and compounding.
Spending retirement money on college may also result in taxes and penalties as well as reduced financial aid, because withdrawals are considered student income, with 50% being considered in the federal aid formula.
Consider opening dedicated accounts just for college, such as 529 plans, which offer special tax benefits for higher education.
MAKE THE MOST OF TAX-ADVANTAGED 529 PLANS
Maximize special gift and estate tax benefits
529 plans allow five years of tax-free gifts in a single year—up to $75,000 per child from individuals and $150,000 from married couples.1
A lump-sum gift at birth may be enough to pay for four years of public college or of private college, as shown in the chart.
All 529 plan gifts and investment earnings are removed from the contributor’s estate without losing control over the assets. This can help grandparents, aunts, uncles and others invest for college while also reducing estate taxes, increasing inheritances and creating family legacies.
1 No additional gifts can be made to the same beneficiary over a five-year period. If the donor does not survive the five years, a portion of the gift is returned to the taxable estate. Please note, the annual gift limit for 2017 is $14,000 from individuals and $28,000 from couples; the maximum five-year/tax-free gift is $70,000 and $140,000, respectively.