Affording College - a Guide for Students and Parents
Education is Getting Expensive
The cost of college continues to escalate. Tuition and fees have been rising by about 5.4% above the rate of inflation for many years, and while college tuition has been increasing, state financial aid support has been contracting with the amount of higher education funding in state budgets.
In theory, the cheapest and easiest way to finance your college education would be to use only gift aid, like grants and scholarships that require no repayment. In practice, while that type of aid abounds, it can be very difficult to piece together enough assistance to cover your education costs completely. The next place to look would be a college savings account, whether created for you over a period of years by your parents or a smaller account consisting of your own savings from part-time work.
Next comes the work-study program, variations on which are provided by the federal government or by individual schools, and thereafter you’d investigate loan options. In borrowing, use only federal loans if possible, because of the additional expense associated with private loans.
Parents: Start Saving For College Early
Investment advisors suggest that you open and start using college savings accounts upon the birth of each child, if you have not already begun to save in anticipation. Establishing the habit of making savings deposits regularly, and preserving the inviolability of a college savings account, are critical steps in paying for your child’s education.
You can obtain free investment advice on current savings plans from a local personal banker by walking into a branch bank, or you could research the plans listed below and make your own decision. Remember changes in the law can affect programs like the 529 and Coverdell, so read any notices you receive about changes to a college savings account with great care.
The U. S. Securities and Exchange Commission offers a solid introduction to the 529 plan (named after the relevant section of the tax code) here. Every state sponsors at least one of the two types of 529 plan, which are pre-paid tuition plans and college savings plans. There are a number of important differences, summed up briefly and generally below:
- Pre-paid tuition plans allow families to buy credits redeemable for tuition and sometimes other college expenses when their child is ready to attend. Most of these plans are sponsored by states, which require you to qualify as state residents in order to participate. Often these pre-payments come with financial guarantees of future validity and value.
- College savings plans let the account holder (usually a parent or guardian) choose one or more investment vehicles like mutual or money market funds. These plans have fewer restrictions like age limits or qualified college expenses, but they are not federally insured.
You can find more information on 529 plans here.
UGMA and UTMA Custodial Accounts
The two types of custodial account were established by separate laws called the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA), and the accounts are named for those acronyms. Many jurisdictions do not permit minors to own property, including investments, and these two account types are ways to make arrangements whereby such property is held by a custodian on a minor’s behalf until the beneficiary comes of age.
In short, UGMA and UTMA accounts are like instant trust funds, and the types of property they can hold varies somewhat with the individual states’ governing statutes. UTMA generally allows more types than UGMA, but you must always check state law to see exactly what’s included. Some examples of property found in the two accounts are securities, insurance policies, annuities, real estate, patents, royalties, and works of art.
Coverdell Education Savings Account
The Coverdell Education Savings Account (Coverdell ESA) is intended as a supplemental college savings plan, since the most you can contribute in any year is $2,000 (which means for all your Coverdell ESAs, if you have more than one). You cannot deduct deposits from your taxes, but the account itself is not taxed until used, and then tax applies only if the distribution exceeds the amount of qualified education expenses. Accordingly, you must follow the rules on qualifying expenses carefully.
In general, tuition, required fees and books, supplies and equipment, and some room and board expenses are qualified. You can read more about Coverdell ESAs here.
Consult The Financial Professionals
Just as you’d consult a personal banker at your own branch, take advantage of financial aid counseling offered by professionals at your high school and college. Be candid about your needs and expectations, and be prepared to take notes when required. Time is very important in successful planning for college, and the moment you enter high school is not too soon to initiate your first conversations on the subject.
The more complete your financing, the more choice you have in selecting a college, but you should be aware that money is an overriding consideration for most college students. However, if your first choice of schools offers you a single scholarship and your third choice has prepared a full financial aid package including gift aid, work-study, and a minimal amount of loan debt, you will have to give serious thought to accepting the more favorable proposal.
The best argument for that practical approach would be reviewing the stories of recent graduates who left their preferred schools in an overwhelming amount of debt and are now realizing they have little prospect of paying as planned. This site is one of many resources available on the subject of paying for successfully, and if you start familiarizing yourself with the material it contains now, you’ll have many of the tools you need to use financial aid to your advantage. An excellent place to begin is this page written especially for high school students.