Over the last twenty years the cost for tuition at public national universities has risen more than 170%. With the cost of college rising year over year, many parents plan to pay for some portion of their child’s college education. What’s the best way to save? That’s what this article will cover.
Consider the Impact of FAFSA, EFC
The Free Application for Federal Student Aid (FAFSA) is used to determine eligibility for financial aid grants and loans. When choosing how to best save for your child’s college, you’ll want to factor in how each savings vehicle impacts the Expected Family Contribution (EFC). The higher your EFC is, the less likely it is that your child will qualify for financial aid. A parent’s assets reduce eligibility by 5.64%. For example, every $10,000 of parental assets eliminates $564 of financial aid.
Additional Savings Account
The simplest way to start saving for your child’s education is to set up a savings account at your local credit union. You can create additional savings accounts, where you can set up automatic transfers funds every month or open an account in your child’s name.
To open additional savings accounts as a WECU member, in the mobile app, go to the “More” button on the bottom right, scroll down and click on “Open an Account” under the “Other” category. After you fill out the form, a Contact Center representative will give you a call in a couple days to confirm. You’ll soon see the account in your mobile banking app. You can give this account any nickname you want to differentiate it from your other accounts. You’ll be able to set up automatic transfers directly through the app or simply move money over whenever you want.
- It’s simple to set up.
- It’s easy to transfer money to the account using online or mobile banking.
- The money is still yours. If you decide not to use the funds for your child’s college education, you can choose not to.
- You won’t see the same sort of growth you would if the money was invested.
- The money won’t likely grow at the rate of inflation.
- Money in a savings account can negatively impact your child’s FAFSA. The government will see those funds as assets which are counted towards your expect family contribution (EFC).
Learn more about savings accounts at WECU: https://www.wecu.com/personal-banking/savings/
First Step Savings Account
You can also set up a First Step Savings account for your child in their name at WECU. These savings accounts come with no fees and children earn 2.5% on the first $500.
- The interest rate on the first $500 is significantly higher than the market savings rate.
- After the child turns 18 years old, these accounts transition to normal savings accounts in the child’s name and they have full control over the funds.
- Money in a savings account can negatively impact your child’s FAFSA.
- For every $10,000 in assets the student has the FAFSA award will be $2,000 lower.
Learn more about First Step Savings Accounts: https://www.wecu.com/personal-banking/first-step/
Washington State Guaranteed Education Tuition (GET) Accounts
The GET program is Washington’s 529 prepaid college tuition plan. You purchase “units” at the current average price. One hundred units purchases the equivalent of one year of college at Washington State’s highest priced public university. The State of Washington guarantees that the value of your account will keep pace with the cost of college tuition, no matter how much it changes in the future.
At the time this article was written, one unit is valued at $114.01 or the equivalent of estimated one year of tuition at $11,401. The funds can be used for any qualified educational expense such as tuition, books, and room and board. You can buy units in whole or partial amounts, from one to 800 units per child. The funds can be used at any college or university in the country.
- Funds are put in after you pay taxes, and they grow tax free.
- The funds keep up with the cost of public universities in Washington State. You benefit if the cost of college continues to increase.
- It’s unlikely that the cost of college would go down (barring legislative action) so you’re likely to see a positive return on dollars invested in this program.
- Each unit is tied to the highest cost public university (currently WSU Pullman) at $11,401 per year for tuition in 2021. In 2005, sixteen years ago, the tuition at WSU was increased to $5,077 annually. It has increased at a rate of 5.19% over those years. There are other savings vehicles that allow you to invest which have historically grown at a faster pace.
- GET units are considered assets and therefore factored into the EFC which can lower FAFSA funds the student receives.
Learn more about the Washington State Guaranteed Education Tuition (GET) Accounts: https://wastate529.wa.gov/howgetworks
DreamAhead College Investment Plan 529
DreamAhead College Investment plan is Washington State’s 529 plan. With these plans, you’re able to contribute as little as $25 and invest the funds. The funds must be used for qualified education expenses.
- Funds are contributed after taxes and grow tax free. There are no taxes for funds used for education expenses.
- There are no income restrictions for who can contribute.
- Anyone can contribute (mom, dad, grandma, grandpa etc.)
- The funds can be used for college or K-12, so they can be used to pay for private school.
- There is no annual contribution limit.
- There is no age limit (funds can be used for education expenses, regardless of the student’s age).
- If funds are taken out and not used for education expenses, there is a 10% penalty plus the withdrawal is added to your ordinary income and taxed.
- Funds are included in the family’s expected financial contribution (EFC) which could negatively impact the student’s FAFSA.
- There are fees. The total annual asset-based fee currently ranges from 0.254% to 0.330%. The plan also charges an annual account maintenance fee which equals $35 plus 0.22% of assets. It’s deducted directly from your account balance.
Learn more about the DreamAhead College Investment Plan 529: https://wastate529.wa.gov/plan-intro
529 in Grandparent’s Name
One way to avoid having assets count towards your family’s EFC is to transfer the custodial name into your child’s grandparents’ name. The updated FAFSA rules from the CARES Act will take effect starting in 2023. At that time, students will not need to report cash support, so distributions from grandparent-owned 529 plans will no longer negatively affect financial aid eligibility.
UGMA, UTSA, Custodial Account
These are accounts that are created for the child but managed by you. Depending on how it’s set up, the funds can be invested.
- You can invest in anything (depending on which financial institution you set it up through).
- Anyone can contribute to the account.
- Can use funds for something other than qualified education expenses such as purchasing a first home.
- You have no control over how the child uses the account when they turn 18.
- It counts as an asset and is included in assets and included in the EFC, which can decrease the amount of FAFSA money the child will receive.
Learn more about UGMA accounts: https://www.investopedia.com/terms/u/ugma.asp
A Roth IRA is an investment vehicle like 401k or IRA which is typically used for retirement saving. Unlike a 401k, taxes are paid on the funds as they go in, and money taken out for retirement is tax free (as long as you’re over 59 ½). While Roth IRA’s are typically used for retirement, there is an exception for early withdrawal when funds are used for qualified education expenses.
There are two benefits to using a Roth IRA. First, because taxes are paid as the funds go in, you’re locking in today’s tax rate. As many people believe taxes could be higher in the future, this could mean that you pay a lower tax rate. Second, you don’t have to pay taxes on the growth of the funds. Say, for example, you contribute $10,000. You pay taxes on $10,000 and then the funds are invested in the account. Let’s say the funds grow to $50,000 by the time you reach retirement, you wouldn’t have to pay taxes on the $40,000 of growth.
When using funds for qualified education expenses, you can take the funds out before the account holder turns 59 ½ without paying the 10% penalty. If you are only taking out funds that were contributed to the account (not the growth) you also will not pay income taxes. Any amount taken out beyond the original contribution amount will be added to your ordinary income for the year.
- Funds grow tax free.
- You have complete control over the funds invested.
- You own the funds and, if they’re not used for education, they can be used for your retirement.
- Funds in a Roth IRA are not included in your expected financial contribution (EFC) and therefore do not negatively impact the student’s FAFSA. However, withdrawals are counted towards your family’s EFC.
- There is a maximum annual contribution limit of $6,000 or $7,000 per year if you’re older than 50.
- You can only have one Roth IRA in your name.
- To contribute to a Roth IRA set up in the child’s name, they must have earned income. The contribution amount can not exceed the child’s total annual earned income.
- Student must be going to school half time or more.
Learn more about Roth IRA’s: https://www.investopedia.com/terms/r/rothira.asp
Coverdale Education Savings Account (ESA)
A Coverdell education savings account is a tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries who must be 18 years old or younger when the account is established.
- Coverdell funds can be used to pay a wide variety of qualified education expenses as well as tuition at private schools for students grades K-12.
- You can control what the funds are invested in.
- No taxes are owed when funds are withdrawn if used for education expenses.
- For a student who chooses to forego attending college, the account can be transferred to a different beneficiary who is under 30 years old.
- Coverdell funds must be used by the time a student is age 30.
- Funds are counted towards the EFC of the family and can negatively affect the student’s FAFSA.
- Only $2,000 can be contributed per year.
- You cannot deduct contributions.
- If you make more than $110,000 as a single person or $220,000 if married filed jointly, you cannot contribute to an ESA.
- You cannot contribute after the child turns 18.
- The penalty of taking the money out and not used for qualified education expenses is a 10% penalty plus the funds are added to your ordinary income.
Learn more about Coverdell ESA accounts: https://www.investopedia.com/terms/c/coverdellesa.asp