College

College savings:

Dave Ramsey - Best Way to Start Saving for College

The Money Guy Show - The Best Ways to Save and Pay For College

1.    Education Savings Accounts (ESA) - First $2,000 per year in a good growth mutual fund.

2.    529 Plans – If you don’t meet the income limits for an ESA, or if you just want to save more than the ESA limits, then a 529 Plan could be a better option

3.    Custodial Accounts (UTMA or UGMA)

Education Savings Accounts (ESA) or Education IRA – Federal Plans

Allows you to save $2,000 (after tax) per year, per child to be used for education expenses.  Plus, it grows tax-free!

Positives:

• Grows tax-free for educational expenses, and the money is free from federal income tax when used for qualified education expenses.

• The account owner maintains full control over the account until the beneficiary reaches 30 years of age.

• Variety of investment options

Negatives:

• You must be within the income limit to qualify

• Contributions are limited to $2,000 per year

• The amount must be used by the beneficiary by the age of 30, otherwise, any amount left will be transferred to the beneficiary and may be taxable upon withdrawal.

529 Plans – State Plans

Every state offers at least one 529 plan, however, some offer multiple 529 plans.

You are not limited to only purchasing the 529 plan from the state you live in. You can purchase from other states regardless of your residence, but check with your own state’s plan first as most offer special tax advantages for residents.

Everyone can contribute to these.

There are different types; prepay tuition and savings plans.  Most suggest doing the savings plan over the prepaid plan.

Dave Ramsey suggests finding 529 plans that would allow you to choose the funds you invest in, and he says to stay away from plans that would freeze your options or automatically change your investments based on the age of your child. 

The Money Guy suggests looking to see if there is a tax benefit for buying the 529 plan from the state you live in, and to research if there are provisions if you want to move or change it if your circumstances change.

The Money Guy: The Ultimate Guide to 529 Plans: What Every Parent Needs to Know and Why College in America is Broken! (And What You Can Do About It)

Positives:

• Grows tax-free, and is free from income tax when used for qualified education expenses.

• Higher contribution rates (this varies by state, but generally you can contribute up to $300,000)

• Most of the time, there aren’t any income limits or restrictions based on age

• The account owner has full control over the account, so you can be sure the money is used for college.

• Can be used to pay for tuition, fees, books, supplies, computers, and certain room and board costs.

• Unused money can be transferred to another beneficiary if unused by the primary beneficiary.

• Can also be used to pay for K-12 education (might not be offered in all 50 states), and most can be used for trade schools.

• Can be rolled into an ABLE account.

• Most plans offer gifting programs, which allow friends and family to make contributions directly into your account.

• If your child gets a scholarship, you can withdraw up to the amount of the scholarship without having to pay the 10% penalty, but you will have to pay taxes on the earnings portion.

            Negatives:

• Restrictions may apply if you choose to transfer your 529 Plan funds to another child.

• Amounts remaining in the account must be distributed when the designated beneficiary reaches the age of 30.

• Money cannot be used for travel costs, health insurance, or extracurriculars.

Any unused portion of 529s can be taken out at any time, however, there will be potential penalties added and taxes will be owed on the earnings portion of the savings (the principal amount (the amount you’ve contributed) will not be subject to taxes as you would have already paid taxes on that amount).

Custodial Accounts: UTMA or UGMA (Uniform Transfer/Gift to Minors Act)

These plans aren’t designed just for education savings.  The account is in the child’s name but is controlled by a custodian (usually a parent or grandparent).  This person manages the account until the child reaches the age of majority, usually age 18-21 depending on the state.  At age of maturity, control of the account transfers to the child to use any way they choose.

For financial aid purposes, custodial accounts are considered assets of the student.  This means that custodial bank and brokerage accounts have an impact on financial aid eligibility.

Positives:

• Flexibility as you can choose how you want to invest the money, with options including mutual funds, stocks, bonds, or CDs.

• The account is still yours until the child reaches the age of majority (per the state, usually 18-21 years old), and then the account belongs to the beneficiary.

• Funds can be used for more than just college expenses.

• Tax advantages for the contributor.

Negatives:

• Beneficiary can use the money however they choose once of legal age (pay for college or a sports car).

• Beneficiary can’t be changed after selected.

Other Great Ways to Pay for College

Grants & Scholarships

Work-Study Programs – working on campus to get tuition credit

Tuition Reimbursement – some employers will offer tuition reimbursement

Co-ops – programs through some universities where you can work a month or so for a company signed up for the program & then the company will pay a portion of your college.

Student Loans – may be another option but be careful.

Student loans should not exceed 60% of your projected first-year income for undergrads, however, for doctors that will be different.  (The Money Guy Show)

FIRE states student loans should be kept under the anticipated first-year salary of the career you are going for.  (ChooseFi – Fire Community Podcast)

For Students:

1.    Apply for scholarships – It’s free money!

Apply for any scholarship you’re eligible for—even the small ones add up fast!  Check out our free scholarship search tool to find thousands of scholarships and grants that can help your kids pay for college.

2.    Take Advanced Placement (AP) classes

These give high school students the opportunity to earn college credits while they’re still in high school.  There could be a fee for taking these classes in high school, but every AP class taken in high school is one less class you’ll need to take or pay for in college.  Talk to your academic counselor for more information.

3.    Get a job

Whether you take on a full-time gig during the summer or a part-time job during the school year, you will be able to save money for college and gain work experience to put on your resume.

4.    Open a savings account

If you are serious about building up your college savings, you’ll need a safe place to keep all that money.  Most banks offer accounts specifically for students, which usually means waived monthly maintenance fees and no minimum balance requirements.  If you’re under 18, you’ll need to be the joint account holder.

5.    Save money instead of spending it

If your get birthday money or an allowance, put it right into your savings account so you are not tempted to spend it.

For Parents:

If you plan to pay half of your kids’ college, one option would be to pay for their spring tuition and have them pay for their fall tuition. This can give them time to work and save during the summer to have money for their fall semester. (Dave Ramsey – Total Money Makeover book)

Tips:

Kids should take the SAT or ACT at least 2-3 times, and they should take a prep course before each time they test. In theory, their grade should go up every time.  (Dave Ramsey – Total Money Makeover book)

Fill out the FASFA early during the kids’ senior year of high school.  (Dave Ramsey – Total Money Makeover book)

In Dave Ramsey’s Total Money Makeover book, he told about one girl who filled out 2 scholarship applications per day starting the spring semester of her senior year.  She was able to get enough scholarships to pay for 3 full years of college.  Dave says there IS money out there; however, you must be willing to work for it.