Posts Tagged ‘College Savings Accounts’

College Saving Misconceptions

Tuesday, April 26th, 2011

 

 

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.