Can Grandma’s 529 Plan Hurt My Kids’ Chances for Financial Aid?

529-plan-hurt-my-kids-financial-aid

Q: My parents saved in a 529 for my son and never told me about it. We’re going to soon apply for financial aid and I’m worried it could hurt his chances. What can we do? — Mom

A: Your parents’ generosity is wonderful, and it’s a good thing they told you about the account.

Here’s where that account will come in.

The first step in determining financial aid eligibility is to estimate your Expected Family Contribution (EFC), said Peter McKenna, a certified financial planner with Highland Financial in Riverdale, New Jersey.

The EFC is the amount that is calculated as part of the Free Application for Federal Student Aid (FAFSA) and forms the baseline for most need-based financial aid, he said.

“The EFC is the figure that the FAFSA calculation determines as the amount that the family can pay towards education expenses for the coming year,” McKenna said.

The calculation assumes that 22% to 47% of parental income and roughly 6% of parental assets (excluding retirement accounts and primary home equity) are available each year for college, McKenna said. Student income and assets are assessed at higher percentages once they are over certain threshold values.

“Most families find the EFC figure to be significantly more than they realistically afford to pay each year,” McKenna said.

There are a number of resources on the web that can help you calculate the EFC.

“You will need your most recent tax return, the value of any investments you might have and a few other documents,” he said. “If your EFC is higher than you expect and not materially lower than the cost of attending the schools he is considering he may not be eligible for need-based financial aid.”

McKenna said if your son may be eligible for need-based aid, a 529 plan that is not owned by the parent or the student will not be counted in the federal EFC formula for the first year. Because the 529 balance is owned by the student’s grandparents, it is not an asset of the student or the parent.

But it gets tricky beyond the first year.

The FAFSA needs to be filled out each year and if your son receives money from a 529 account owned by anyone other than his parents, it is put into the EFC formula as student income, McKenna said.

“If your son was eligible to receive need-based financial aid in his first year, it is entirely possible that the withdrawals from the 529 would reduce or eliminate his aid for subsequent years,” he said. “Some families get around this issue by delaying any non-parental 529 account withdrawals until after the last FAFSA is filed, e.g. after January of the student’s junior year in college.”

There is some other bad news to consider.

McKenna said while the federal formula excludes 529 accounts owned by other people, many schools have their own institutional formulas for calculating need-based aid. Some of these will ask if the student is the beneficiary of any trusts or 529 accounts that are not owned by the parent.

Image: monkeybusinessimages

The post Can Grandma’s 529 Plan Hurt My Kids’ Chances for Financial Aid? appeared first on Credit.com.

Fewer Than 1-in-5 Families Use a Tool That Could Limit College Costs

saving_for_college_tuition

Setting aside savings can be difficult, particularly if you’re trying to raise a family — and that includes saving for your kids’ college educations. Only two out of five families have a savings plan for higher education prior to their student’s enrollment, and just 16% of families are using 529 college savings vehicles to pay for college expenses.

That’s according to the annual survey report “How America Pays For College” from Sallie Mae and market research firm Ipsos. The report reflects the results of telephone interviews conducted between March 16 and April 18, 2016, with 799 parents with children ages 18 to 24 who are enrolled as undergraduate students and 799 undergraduate students, ages 18 to 24.

The number of families using savings from 529 college savings plans or other college savings vehicles fell slightly from 17% in 2015 to 16% in 2016, the survey found. The average amount used from these accounts also dropped slightly, from $9,129 in 2015 to $8,315 this year.

Much like a Roth IRA, 529 savings plans have several tax advantages that can make them useful when saving for college. Contributions to the account are taxed but any earnings made on interest accrue federal tax-free. And withdrawals from the account are also tax-free so long as they’re put towards college expenses.

Families With a Plan Spend Less

The survey also found that families who did not have a college savings plan in general prior to their student’s enrollment reported spending more than twice their savings and income on college expenses over those families who did. Also, those families who had a plan reported a full one-third less borrowing by the student than those from families without a plan.

“It’s clear that having a plan for college really does pay off,” Rick Castellano, a Sallie Mae spokesperson, said in an email. “Those families with a plan are, as you might expect, more informed, but they are also saving more for college and borrowing less.”

Screen Shot 2016-06-28 at 10.39.43 AM

Chart courtesy of Sallie Mae

Families with a plan also reported greater peace of mind in regard to paying for college. The survey showed:

  • 61% of families with a plan felt completely confident they had made the right financial decisions about paying for college, compared to 41% of families without a plan.
  • 45% of planners reported never or rarely being stressed over education expenses, compared to 32% of non-planners.
  • Parents who planned were less likely to be very worried than non-planners about the possibility of loan rates rising (12% vs 29%) or tuition increasing (17% vs. 28%).

Scholarships, Grants Still Largest Resource

Of the average amount families reported paying for college — $23,688 — scholarships and grants funded an average of $8,059, or 34%, the report said. That’s an increase of four percentage points over 2014-15 and represents the largest proportion of any resource used to pay for college in the past five years, according to Sallie Mae.

Parental income and savings averaging $6,867, or 29% of total spending on college, came in as the second largest funding resource. That’s slightly lower than last year’s high of 32%, the report said.

Screen Shot 2016-06-28 at 9.35.11 AM

Chart courtesy of Sallie Mae

Student borrowing was the third most-used resource to pay for college, averaging $3,176, and money borrowed by students paid 13% of all college costs, the survey found — slightly less than the prior year’s 16%.

The survey also found that 90% of families expect their college student to earn at least a bachelor’s degree, including one-third of those students attending community college, and more than half (54%) expected their student to get a graduate degree.

If you’re ready to start saving for your child’s college education, it’s a good idea to educate yourself on the various forms of student loans and the federal aid options that might be available to you and your family — and how those options might impact your finances and your credit. (You can see a summary of your credit report for free on Credit.com to get an idea of where you stand.) The more informed you are, the less worried you may be about affording college expenses.

More on Student Loans:

Image: Kali Nine LLC

The post Fewer Than 1-in-5 Families Use a Tool That Could Limit College Costs appeared first on Credit.com.