College Saving Misconceptions

 

 

Scholarship Relief Parents are often off base when planning for their child’s college education funding. For example, 56% of parents expect scholarships to help pay for college. In actuality, the largest percentage of students receiving scholarships in any year between 1999 and 2008 was 6.9% Therefore, if your plan is to have your child’s education at least partially funded by scholarship, chances are, you will be in for a big surprise.

 

Financial Aid Restrictions Another common misconception is that having a 529 college savings plan will severely restrict a student’s ability to qualify for financial aid. In truth, the financial aid formula assumes that a student will contribute 20% of their assets toward college expenses while parents will only contribute 5.6% of theirs. Since 529 plans generally have the parents as the owners, amounts saved in these plans will generally have a smaller impact on the financial aid formula.

 

Cost Estimates Expense estimates can also easily be misconstrued due to inflationary rates, tuition increases, type of schools, tax affects and other like criteria.

According to CollegeBoard.com, the current average cost of tuition and fees at a private four-year college is $27,293 per year and the average for state schools is $ 7,605 – not including (in either case) the costs for: room and board, books, supplies, transportation, other living expenses and so forth.

 

Inflationary rates and tuition increases will further affect the mix. While there is some debate regarding this rule of thumb, the college inflation rate is roughly 2% higher than the average annual rate of inflation and the current average annual rate of tuition increases is 8% per year. If these rates hold true to form, parents with newborns today can expect to pay more than three times these amounts by the time their child goes to college: $81,879 and $22,815, respectively, per year.

 

Tax benefits will vary by the State you live in. Illinois residents will gain some additional benefits for  contributing to the Bright Directions Plan and can reduce their Illinois taxable income by up to $10,000 for a single person or $20,000 for a married couple filing jointly if they contribute to a Bright Start 529 plan. With the recent increase in Illinois personal income tax rates that became effective January 1, 2011, this could reduce the Illinois taxes owed on a married couple by up to $1,000 on a $20,000 investment. Furthermore, the Illinois law also allows the deduction for rollovers from other 529 plans into the Bright Start Program. Therefore, it may be in a friend or family member’s best interest to roll assets from out of state plans to the Bright Start program in Illinois to take advantage of the state income tax benefits.

 

Take Away

 

* Scholarship money is not a valid college planning tool.

 

* Parent owned 529 plans have a small impact on financial aid calculations.

 

* Inflationary rates, annualized tuition hikes and taxes should be included in cost projections.

 

 

Tags: , , , , ,

4 Responses to “College Saving Misconceptions”

  1. Angela Brown says:

    Hello Sir/Mam,

    I am Angela Brown, contributory writer for some financial communities. I just visited your site ruschfinancial dot com And trust me I really liked the work you have done for your site. I read some of the articles and they were just too good.

    After seeing this, I have come to the conclusion that I would do something for your site with your prior permission. I would love to write an original article as a “Guest” on any financial topic of your choice. In return you can give me a back-link either in the content or the author bio section. The article will be unique and will be published only in your site.

    Waiting for your opinion.

    Thanks,

    Angela Brown
    Content Marketing Executive
    http://www.facebook.com/profile.php?id=100001465303818

  2. I don’t really like posting long reviews…and I never post reviews…but after i went through your post. I think leaving without a review would be injustice to me…I liked it very much…thanks

  3. Watchman says:

    Salut, just bookmarked your site! I’ll be back for sure to check out your future postings…such a type of blog post is really rare these days – between all these standard blabla bloggers. A coo column. Many thanks for sharing it up! Ciou

Leave a Reply