CloudFi | Finances for Growing Families

If you are a parent to be, you’ve probably been undergoing a flurry of planning activities, from decorating the nursery to researching baby names. College savings is probably not high on the priority list. Yet, considering the impact of tax-free compound growth over time, it should be. Taking the college savings plunge in the early years can pay-off exponentially in the long-run.

529 Plans and the Coverdell ESA

One of the best way to save for school is to sign-up for a college savings plan. These plans are often called “529 plans,” after the section of the IRS tax code that authorizes them. All 50 states sponsor them. There is no minimum investment. The maximum allowed contribution follows federal gift tax regulations — 13K per year, or 65K over 5 years and, for a couple filing jointly, 26K per year, or 130K over five years per donor. You must invest in the investment options available under the plan. However, you aren’t limited to investing in the 529 plan sponsored by your home state. Instead, you have the option of investing in any of the 50 state sponsored 529 savings plans. And, you can use the earnings from any 529 plan to pay for college expenses in any state, not just your own.

There are different types of 529 plans, including 529 prepaid plans and 529 savings plans. 529 prepaid plans allow you to lock-in today’s tuition rate at public and some private colleges in a particular state. 529 savings plans can be made up of mutual funds. There are also several 529 savings plans that give you the option to invest in FDIC insured CD’s or guaranteed products. All grow tax free and can be used for any qualified higher education expenses, such as tuition, room and board, and miscellaneous college expenses. There are now about $100B invested in about 80 529 plans across the U.S.

The Coverdell ESA (formerly known as an Education IRA) is a flexible, supplemental tool that can be used to help finance education at any level, from K-12 through graduate school. Coverdell ESAs allow eligible parents, family members, and students to contribute up to $2,000 per year per child (until that child reaches age 18) toward qualified education expenses at any college, university, vocational, elementary, or secondary school. The benefits include tax-deferred growth and tax-free withdrawals when the proceeds are used to fund qualified education expenses. And, there are no restrictions that prevent parents from contributing to both a 529 plan and their ESA each year.

Financial aid

This year the US Department of Education (ED) will provide more than $116 billion this year to help millions of students and families pay for postsecondary education.

Many higher priced universities actually offer more financial aid options than their public counterparts. So, while the price tag might seem high, they can offer greater access for families with more limited means. As tuition hikes at universities in states like California become more common place, financial aid will become an increasingly important tool for more and more families. And those with the cash, might just end-up paying more.

The available options are broken down into grants, work-study programs and loans.

Grants are funds for college that do not have to be re-paid. Popular federal programs include the Pell Grant and the Teacher Education Assistance for College and Higher Education Grant (TEACH Grant). When it comes to award amount, there is a wide-range.

Work-study programs allow your child to earn funds towards tuition while he or she is enrolled in a particular university, college or training program.

Qualifying for grants and work-study programs depend on need, which is determined based upon what you are able to contribute to your child’s education, according to your income and assets.

Finally, a number of student loan options exist. Sallie Mae is well-known in the education world for providing federal and private student loan programs for undergraduate and graduate students and their parents.

Some student loans, such as the Federal Perkins loan, are sponsored by the university or college, whereby the university or college functions as the lender. Other programs, such as FFEL Stafford loan programs, use a third-party lender who is required to pay the interest on the loan while your child is in college. Eligibility for specific loan programs, especially loans incurred for graduate or professional degrees, can depend upon creditworthiness. So it is important to help your child establish good credit practices early-on.

Scholarships

According to College Board, a non-profit organization dedicated to helping parents and children plan for college, thinking local is the first plan of attack when researching scholarships. Smaller geographical locations offer better probabilities when it comes to securing a scholarship. Next in line are scholarships that are more national in scope.

Keep-in mind that some of the industry or professional organizations to which you belong and even your employer might be a source for financing your child’s education through a scholarship.

While academic performance can often be a predictor of success when it comes to securing a scholarship, it isn’t the only factor. Options exist that usually consider your child’s other attributes and aren’t just for the 4.0+ student. Sallie Mae has a fairly comprehensive scholarship database, a searchable link to more than 3 million scholarships worth over 16 billion dollars. According to the organization, it is expanded and updated daily.

A critical path

There is a lot of work that goes into college planning. And while paying for college might seem daunting at first, getting started now can make a big difference for you and your child. CloudFi’s college savings tool offers a personalized, step-by-step guide to 529 plans to help you get started on the college savings track. The more you save now, the less you will have to borrow or leave to chance.