College Planning

Covering the Cost of College Using 529 Plans, Coverdell ESAs, UTMA or UGMA accounts

Scott Weiss, CFP® · September 11, 2019 · College Planning, Financial Planning, Spending & Saving · No Comments

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You can plan to meet the costs through a variety of methods.

How can you cover your child’s future college costs?

Saving early (and often) may be the key for most families. Here are some college savings vehicles to consider.

529 plans

Offered by states and some educational institutions, these plans let you save up to $14,000 per year for your child’s college costs without having to file an IRS gift tax return. A married couple can contribute up to $28,000 per year. (An individual or couple’s annual contribution to the plan cannot exceed the IRS yearly gift tax exclusion.) These plans commonly offer you options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country. (1,2)

While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences. (1)

Grandparents can start a 529 plan, or other college savings vehicle, just as parents can; the earlier, the better. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself. (1)

529 plans have been improved with two additional features. One, you can now use 529 plan dollars to pay for computer hardware, software, and computer-related technology, as long as such purchases are qualified higher education expenses. Two, you can now reinvest any 529 plan distribution refunded to you by an eligible educational institution, as long as it goes back into the same 529 plan account. You have a 60-day period to do this from when you receive the refund. (3)

Investors should consider the investment objective, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. A copy of the official statement can be obtained from a financial professional. Before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

Coverdell ESAs

Single filers with adjusted gross income (AGI) of $95,000 or less and joint filers with AGI of $190,000 or less can pour up to $2,000 annually into these tax-advantaged accounts. While the annual contribution ceiling is much lower than that of a 529 plan, Coverdell ESAs have perks that 529 plans lack. Money saved and invested in a Coverdell ESA can be used for college or K-12 education expenses. Coverdell ESAs offer a broader variety of investment options compared to many 529 plans, and plan fees are also commonly lower.(4)

Contributions to Coverdell ESAs aren’t tax-deductible, but the account enjoys tax-deferred growth and withdrawals are tax-free so long as they are used for qualified education expenses. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn when the beneficiary turns 30 (there is a 30-day grace period), or taxes and penalties will be incurred. Money from a Coverdell ESA may even be rolled over tax-free into a 529 plan (but 529 plan money may not be rolled over into a Coverdell ESA). (2,4)

UGMA & UTMA accounts

These all-purpose savings and investment accounts are often used to save for college. When you put money in the account, you are making an irrevocable gift to your child. You manage the account assets. When your child reaches the “age of majority” (usually 18 or 21, as defined by state UGMA or UTMA law), he or she can use the money to pay for college. However, once that age is reached, that child can also use the money to pay for anything else.(5)

Imagine your child graduating from college debt-free. With the right kind of college planning, that may happen.

▲Comparing college savings vehicles

529 plan: Potential for tax-free investing for qualified education expenses;* high levels of flexibility, control and contribution maximums along with special gift and estate tax benefits.
Custodial account: Less tax efficiency and control than other accounts; higher impact on financial aid eligibility.
Coverdell account: Potential for tax-free investing for any qualified education expense; more restrictions and lower contributions than other accounts.
Key takeaway: Not all college savings plans are the same. Differences among accounts can have a major impact on current taxes and future college funds.

* Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Federal law allows distributions for tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private or religious school (“K-12 Tuition Expenses”) of up to $10,000 per beneficiary per year. Under New York State law, distributions for K-12 Tuition Expenses will be considered non-qualified withdrawals and will require the recapture of any New York State tax benefits that have accrued on contributions.

Sources

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Smart Strategies for Coping With Student Loan Debt

Scott Weiss, CFP® · July 3, 2018 · College Planning, Credit & Debt, Personal Finance · No Comments

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Paying them down and managing their financial impact.

Is student loan debt weighing on the economy?

Probably. Total student loan debt in America is now around $1.5 trillion, having tripled since 2008. The average indebted college graduate leaves campus owing nearly $40,000, and the mean monthly student loan payment for borrowers aged 30 and younger is about $350. (1,2)

The latest Federal Reserve snapshot shows 44.2 million Americans dealing with lingering education loans. The housing sector feels the strain: in a recent National Association of Realtors survey, 85% of non-homeowners aged 22-35 cited education loans as their main obstacle to buying a house. Eight percent of student loan holders fail to get home loans because of their credit scores, the NAR notes; that percentage could rise because the Brookings Institution forecasts that 40% of student loan borrowers will default on their education debts by 2023. (1,3)

If you carry sizable education debt, how can you plan to pay it off?

If you are young (or not so young), budgeting is key. Even if you get a second job, a promotion, or an inheritance, you won’t be able to erase any debt if your expenses consistently exceed your income. Smartphone apps and other online budget tools can help you live within your budget day to day or even at the point of purchase for goods and services.

After that first step, you can use a few different strategies to whittle away at college loans.

The local economy permitting, a couple can live on one salary and use the wages of the other earner to pay off the loan balance(s).
You could use your tax refund to attack the debt.
You can hold off on a major purchase or two. (Yes, this is a sad effect of college debt, but it could also help you reduce it by freeing up more cash to apply to the loan.)
You can sell something of significant value – a car or truck, a motorbike, jewelry, collectibles – and turn the cash on the debt.

Now in the big picture of your budget.

You could try the “snowball method” where you focus on paying off your smallest debt first, then the next smallest, etc., on to the largest. Or, you could try the “debt ladder” tactic, where you attack the debt(s) with the highest interest rate(s) to start. That will permit you to gradually devote more and more money toward the goal of wiping out that existing student loan balance.

Even just paying more than the minimum each month on your loan will help.

Making payments every two weeks rather than every month can also have a big impact.

If a lender presents you with a choice of repayment plans, weigh the one you currently use against the others; the others might be better. Signing up for automatic payments can help, too. You avoid the risk of penalty for late payment, and student loan issuers commonly reward the move by lowering the interest rate on a loan by a quarter-point. (4)

What if you have multiple outstanding college loans?

If one of them has a variable interest rate, try addressing that one first. Why? The interest rate on it may rise with time.

Also, how about combining multiple federal student loan balances into one? That is another option. While this requires a consolidation fee, it also leaves you with one payment, perhaps at a lower interest rate than some of the old loans had. If you have multiple private-sector loans, refinancing is an option. Refinancing could lower the interest rate and trim the monthly payment. The downside is that you may end up with variable interest rates. (5)

Maybe your boss could help you pay down the loan.

Some companies are doing just that for their workers, simply to be competitive today. According to the Society for Human Resource Management, 4% of employers offer this perk. Six percent of firms with 500-10,000 workers now provide some form of student loan repayment assistance. (6)

To reduce your student debt, live within your means and use your financial creativity. It may disappear faster than you think.

Need Additional Help?

Visit the Student Loan Borrowers Assistance website. The National Consumer Law Center’s Student Loan Borrower Assistance Project is a resource for borrowers, their families, and advocates representing student loan borrowers.

Sources

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Guide to Financing a College Education for Parents and Grandparents

Scott Weiss, CFP® · May 30, 2018 · College Planning · No Comments

johns-hopkins-university-1590925_1920

A primer for parents and grandparents.

A university education can often require financing and assuming debt.

If your student fills out the Free Application for Federal Student Aid (FAFSA) and does not qualify for a Pell Grant or other kinds of help, and has no scholarship offers, what do you do? You probably search for a student loan.

A federal loan may make much more sense than a private loan.

Federal student loans tend to offer kinder repayment terms and lower interest rates than private loans, so for many students, they are a clear first choice. The interest rate on a standard federal direct loan is 4.45%. Subsidized direct loans, which undergraduates who demonstrate financial need can arrange, have no interest so long as the student maintains at least half-time college enrollment. (1,2)

Still, federal loans have borrowing limits, and those limits may seem too low.

A freshman receiving financial support from parents may only borrow up to $5,500 via a federal student loan, and an undergrad getting no financial assistance may be lent a maximum of $57,500 before receiving a bachelor’s degree. (That ceiling falls to $23,000 for subsidized direct loans.) So, some families take out private loans as supplements to federal loans, even though it is hard to alter payment terms of private loans in a financial pinch. (1,2)

You can use a student loan calculator to gauge what the monthly payments may be.

There are dozens of them available online. A standard college loan has a 10-year repayment period, meaning 120 monthly payments. A 10-year, $30,000 federal direct loan with a 4% interest rate presents your student with a monthly payment of $304 and eventual total payments of $36,448 given interest. The same loan, at a 6% interest rate, leaves your student with a $333 monthly payment and total payments of $39,967. (The minimum monthly payment on a standard student loan, if you are wondering, is typically $50.) (3)

When must your student start repaying the loan?

Good question. Both federal and private student loans offer borrowers a 6-month grace period before the repayment phase begins. The grace period, however, does not necessarily start at graduation. If a student with a federal loan does not maintain at least half-time enrollment, the grace period for the loan will begin. (Perkins loans have a 9-month grace period; the grace period for Stafford loans resets once the student resumes half-time enrollment.) Grace periods on private loans begin once a student graduates or drops below half-time enrollment, with no reset permitted. (4)

What if your student cannot pay the money back once the grace period ends?

If you have a private student loan, you have a problem – and a very tough, and perhaps fruitless, negotiation ahead of you. If you have a federal student loan, you may have a chance to delay or lower those loan repayments. (3)

An unemployed borrower can request deferment of federal student loan payments.

A borrower can also request forbearance, a deferral due to financial emergencies or hardships. Interest keeps building up on the loan balance during a forbearance, though. (1)

At the moment, federal student loans can be forgiven through two avenues.

The first, the Public Service Loan Forgiveness (PLSF) program, requires at least 10 years of public service, government, or non-profit employment, or at least 120 student loan payments already made from the individual. The second avenue, income-driven repayment plans, first lowers the monthly payment and extends the payment timeline based on what the borrower earns. If the balance is finally forgiven, the loan forgiveness is seen by the Internal Revenue Service as taxable income. (If you have student loan debt forgiven via the PLSF, no taxes have to be paid on the amount.) (1,3)

Consult financial aid officers and high school guidance counselors before you borrow.

Get to know them; request their knowledge and insight. They have helped other families through the process, and they are ready to try and help yours.

Lastly, avoid draining the Bank of Mom & Dad.

If your student needs to finance a college education, remember that this financial need should come second to your need to save for retirement. Your student has a chance to arrange a college loan; you do not have a chance to arrange a retirement loan.

Sources:

3 Things to Know About Paying For College [VIDEO]

Scott Weiss, CFP® · June 8, 2016 · College Planning, Video · 529 Plan · No Comments

There’s 73 million children Living in America today and the choices they make will impact the future of your family. Unfortunately, there’s no single formula for success. However, there is one proven path that provides lifelong advantages, the path of higher education.

3 Advantages of Having a College Degree:

College graduates have lifetime earnings 84% greater than those without a degree.
College graduates tend to live healthier Lifestyles.
College graduates have increased job satisfaction and stability.

Difficulties Paying for College:

Today most American families face growing problems paying for college. Over the last 30 years College tuition has increased nearly three times the rate of inflation. Access to Grants and scholarships is on the decline and student loan debt has ballooned over 500% in the past 10 years. In fact, student loan debt is now approaching one trillion dollars.

Over the last 30 years College tuition has increased nearly three times the rate of inflation.

While some can fund their children’s entire education most families rely on multiple sources to pay for their college expenses. Still, over 60% of families don’t have a college saving strategy.

3 Things You Need to Know:

How Much Will College Cost?
What Do You Need to Save?
Where to Invest?

It’s never too early to start planning for your children’s education but it can be too late. Learn how much College will cost and what you need to save so you can put your children on the right path to success.

If you need help creating a college savings strategy feel free to send me an email at sweiss@weiss-financial.com.

How To Pay For College: 6 Smart Tips

Scott Weiss, CFP® · April 13, 2016 · College Planning, Video · 529 Plan, Americorps, FAFSA, Financial Aid, National Health Service Corps, National Smart Grants, Peace Corps, Pell Grants, ROTC Programs · No Comments

It’s no secret that college is expensive. In fact, many colleges now cost over $50,000 a year when you include tuition, room and board, and other expenses. Now, we all want the best for our kids but how exactly can the average person afford to pay over $200,000 for a 4 year degree? The key is to start saving early and know your funding options. Here are 6 smart tips to help you pay for that dream college:

1. Use a 529 Plan

529 Plans are a great way to save for college. The contributions grow tax deferred and withdrawals are tax free if used for education expenses. For New York State residents looking to open a 529 Plan check out New York State’s 529 College Savings Program.

2. Apply for financial aid

Once you have kids attending college, always fill out the Free Application for Student Federal Aid (FAFSA), even if you don’t think you’ll qualify. There are government backed low interest loans that many parents use to defer tuition costs. The deadline for submitting the FAFSA is June 31st but you’ll want to get it in as early as possible to ensure you don’t miss out on any available aid.

3. Seek national grants

Here are some options:

4. Apply to several schools

To increase your chances of getting financial aid, make sure your child applies to several schools. The more schools they are accepted to, the more chances they will have to receive financial aid.

5. Service in exchange for tuition

These organizations offer college money in exchange for a service commitment after graduation:

6. Live at home & go to community college

Don’t rule out living at home and going to a community college for the first 2 years, then transfer to a 4 year college or university for the final 2 years. You’ll save money on tuition and room and board. This is a super smart strategy and one that many more people should consider taking advantage of. The cost of community college is much less than you’d pay at a 4 year college. If you transfer to that 4 year college in year 3 and graduate you’ll still end up with the same degree but for a fraction of the cost.

No doubt college is expensive, however the benefits for your child to attend college are quite compelling.

Video:

For more financial planning tips, download my free report: “8 Steps to Organize and Optimize Your Financial Life”. Thanks for reading!

My Recent Posts on Nerdwallet’s ‘Ask an Advisor’

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From Around the Web

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Retiring at 40 is a tough goal to achieve. Learn 5 lessons from people who actually pulled it off.
Many people have concerns about paying for traditional long-term care insurance policies since they may never use them. To combat these concerns, insurance companies have developed hybrid LTC policies that combine life insurance with long-term care. Are they right for you?

Great Resources

Need a simple and easy to use tool to help you keep track of your budget. Take a look at youneedabudget.com (YNAB). Great for people who love tech that can help improve their life!
Got taxes on your brain? The IRS has a pretty good YouTube channel. It’s particularly worth checking out their videos on ID theft.
Use our retirement Check-Up tool to see if you are on track with your retirement savings goals.

If you like this post, you might also like my FREE report: “8 Steps to Organize & Optimize Your Financial Life”. Check it out here!

From Around the Web:

If you have kids heading into college in September you’ll need to file a FAFSA. It can be a confusing form, particularly if it is your first time filling out. Here are answers to the 10 most common FAFSA questions according to Money Magazine: http://time.com/money/4194417/fafsa-faqs-college-aid-questions/
Do you have kids and haven’t saved for college yet? Not sure you want to open a 529 Plan? Here are 4 Alternative Ways to Save for College, including the pros and cons for each option: http://time.com/money/4196687/alternative-college-savings-529/
Are your kids graduating college this year? It’s time for them to get out and look for a job! Take a look at this list. CareerBuilder ranked the 10 fields where demand is greatest in 2016 (spoiler alert: Registered Nurses claimed the top spot): http://fortune.com/2015/12/28/the-hottest-jobs-of-2016/
Glassdoor released another list ranking the 25 best jobs for 2016. Their list is based on salary, career prospects, and number of openings. There is some overlap with CareerBuilder’s list except they grant the #1 ranking to “Data Scientist”: http://fortune.com/2016/01/19/glassdoor-best-jobs/
Tax Season = Fraud Season. I can’t stress enough how it important it is to watch out for these scams. They seem to pop up every year and people continue to fall for them despite all the media coverage and warnings. So, do yourself a favor and read this article if it’s the only one you read from my picks: http://www.marketwatch.com/story/4-tax-scams-to-watch-out-for-2016-02-02
Are you retired? Here’s a great list Steven Stern, CPA, CGMA shared with me outlining 9 IRS audit red flags specifically for retirees: http://m.kiplinger.com/slideshow/retirement/T056-S011-irs-audit-red-flags-for-retirees/index.html?rid=EML
My final bit of info to share isn’t actually an article but a link to Weiss, Orro, & Stern’s FREE Year-End Tax checklist. Use this handy checklist to make sure you’ve gathered all the documents you need for your tax preparer: https://d1sh7ow6wurp05.cloudfront.net/Weiss_YearEndTaxChecklist.1449071973942.pdf

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You can also let me know if you are enjoying the content I am sharing and if there is anything in particular you’d like to read about or have me write about. My goal is to send you these round ups once a month and write at least one original piece of content per month. Thanks for reading!