College Planning

College costs have been rising higher than the rate of inflation. More than 60 colleges now have a sticker price (tuition, fees, room and board) that's over $60,000 a year. While many college students receive some form of financial aid, applying for and maximizing your eligibility can be a challenging process. If you have children, you must have a plan. Consider this: a 13-year old has less than 60 months to left to save. The earlier you start, the better off you’ll be. Below are some of the common methods used to pay for college:

The Uniform Transfers to Minors Act (UTMA): allows a minor to receive gifts, such as money, stock, patents, royalties, real estate and fine art. Under the UTMA, the gift giver or an appointed custodian manages the minor's account until legal age. The property belongs to the minor, and earnings are taxed at the child's tax rate. It’s important to note that this may have a negative impact when the minor applies for financial aid or educational scholarships.

529 College Plan: provides tax advantages when saving and paying for higher education. The plans allow a person to grow savings on behalf of a beneficiary, who could be a child or grandchild, spouse or even themselves. A 529 plan may be established by anyone for a designated beneficiary. There is no limit on the number of 529 plans an individual can set up, but contributions should not exceed the cost of education nor the limit as set by the state.

There are two kinds of 529 plans:

• Prepaid Tuition Plans: allow the plan holder to prepay for the beneficiary's tuition and fees at a designated institution. Under a prepaid tuition program, eligible expenses for a fixed period of time or a fixed number of credits are prepaid.
  
  For example, an individual may make prepayments for two future semesters of college at today's cost. The prepayment guarantees the beneficiary two semesters, regardless of the cost in the future. This means that the college bears the risks of the investments. Contributions are limited to amounts necessary to pay the beneficiary's qualified education expenses.
  
  Prepaid plans differ in their specifics, but often have limitations that do not apply to 529 Savings Plans, such as age caps and residency requirements. They often have stricter limits on what expenses they can cover. Textbooks or room and board may not be eligible. On the other hand, some prepaid plans are guaranteed by states, while savings plans are subject to market risk.
  
  While prepaid plans are typically designed to pay for tuition at a designated school, the funds can usually be transferred or refunded in case your child chooses a different school.
  
  With the exception of the Massachusetts U.Plan, all of the state-sponsored prepaid 529 plans are only available to state residents.
• Savings Plans: 529 College Savings Plans offers a flexible, a tax-advantaged way to save for college. Plan holders open an account and have the option to invest in a range of mutual funds. Earnings from the 529 plan are exempt from federal income taxes, providing the withdrawals are used for qualified educational expenses. Distributions that are not used to pay for qualified educational expenses are subject to taxes and a 10% penalty, with exceptions for circumstances such as death and disability.
  
  Contributions to a 529 plan are not deductible on your federal income tax, however, some states do offer a tax deduction under certain circumstances.
• Student Loans - There are two kinds of student loans:
  
  Federal student loans: These are issued by the government and anyone with a high school diploma is eligible. The very first step is to fill out a form called the FAFSA — Free Application for Federal Student Aid. The information on your FAFSA is what the government and schools use to determine your eligibility for financial aid. This can come in the form of grants, work-study, student loans and even scholarships. If you’re awarded a grant, that money is free — so you don’t have to pay it back. Grants are typically smaller amounts of money, so even if you get one, you will likely still have to take out student loans — which you do have to pay back. Work-study opportunities allow students to work for the school to cover a portion of their tuition. Scholarships are like grants, if you’re awarded a scholarship, you don’t have to pay the money back.
  
  Private student loans: These are issued by private banks or other financial companies. With a private loan, you borrow money directly from the bank instead of the department of education. BE CAREFUL!!
  • Private student loans have much higher interest rates — so they’ll cost you a lot more over time.
  • When it comes time to pay them back, there’s really no wiggle room and you don’t have any of the repayment options available for federal loans that can help you with your loan payments.
  • Private lenders aren’t really there to help you through obstacles during your repayment period — they will come after you for the money owed.