Ready to start saving money for college? Learn the basics to get started today!
If you have kids, it’s already time to start saving money for college. The sooner you begin, the better chance your kids have at attending their programs of choice. But saving is tough when you’re worried about making ends meet. You might also be confused about how much or where to save money, especially since, when done the wrong way, college savings can interfere with federal funding.
When College Savings Work Against Financial Aid
When filling out the Free Application for Federal Student Aid (FAFSA), students and their families report their assets and income to determine how much federal aid a student is eligible for, including scholarships and grants you won’t have to repay. Parent assets affect aid eligibility much less than student assets, so it makes sense to keep any college savings in the parents’ names.
Some assets – like homes, cars and retirement plans – aren’t listed on the FAFSA, which caused some parents to think using a 401(k) or IRA for their kids’ college expenses would give them an eligibility boost. The problem with this thinking is that once funds are withdrawn to pay for college expenses, those payouts are listed as student income on the next year’s FAFSA application. It can reduce their aid eligibility by up to 20% of the funds withdrawn. Those funds might also impact parent and child federal, state and local income taxes.
Thankfully, there are better ways to save. Follow these tips to save the most for college in a way that won’t put your other resources at risk:
Invest in US Savings Bonds for College Savings
Parent-owned US Savings Bonds are a tax- and federal-aid-friendly method used to save for college. Proceeds from US Savings Bonds can be spent on anything, but their proceeds are tax-deferred or tax-free in certain situations. Up to $10,000 in EE Series and I Series bonds can be used for eligible education expenses tax-free each year. Bonds are also fully backed by the federal government.
You can start saving with US Savings Bonds today for as little as $25. All bonds are now purchased through the Treasury Direct website, so you won’t receive a paper copy but a digital e-bond stored in your online account.
Open a Section 529 Plan
Section 529 Plans offer parents, students, extended family and family friends an easy way to save for college. The Georgia 529 plan is called Path2College. Run by the Georgia Office of the State Treasurer, the Path2College 529 Plan offers families the following benefits:
- Tax-deferred growth, so you won’t pay taxes on interest as your account ages
- Tax-free disbursements for qualified college education expenses
- State income tax deductions on up to $4,000 in contributions per year
- Multiple investment options
- Enroll for just $25
Section 529 plans owned by parents must be claimed as parental assets on the FAFSA. They can discount your student’s eligibility by 5.64% of the value of the fund. However, disbursements spent on qualified education expenses are not counted as student income as long as the student or parents own the account. Grandparents and others will want to look at strategies used to protect against reducing aid eligibility..
What happens if the student opts out of college? Unlike some savings programs, the money saved in a 529 Plan doesn’t expire. You can save it for many years in case your student changes their mind. You can also place a new beneficiary on the account.
Saving for college is a serious responsibility. Thankfully you don’t have to do it all at once. Start soon, start small, and save smart to protect your child’s federal aid eligibility while providing them with the cash to get the best start in life.
Visit your nearest Title Tree store for more tips on saving money for college – or if you need a little help making ends meet right about now.