| About 60% of all aid is in the form of loans, and | | | | Don: I think you've been looking at that sheet! |
| increasing. | | | | Anyway, so that's a good point. Once you're set with |
| Saving: For example, if you start saving when your | | | | the savings, you put aside $26,000 for the $40,000. |
| child is 5 years old, you will have 13 years to save | | | | Borrowing, he borrows the same $40,000 and he has |
| before your child enrolls in college. If you can put | | | | to repay $55,000. There's almost a $30,000 |
| aside $167 per month - that's $2,000 per year - you | | | | difference in this example between savings and |
| will have saved $26,000 by the time your child begins | | | | borrowing. |
| college. | | | | Karl: Right and I agree with you. I think that if you do |
| With a 6% return over the thirteen-year period, your | | | | the numbers it works out to be $167 per month for |
| $26,000 will have grown into $40,000. That $40,000 | | | | me right now. I think that if you start putting away |
| will be available to help you pay for your child's | | | | that amount of money, you just get used to it, you |
| college expenses like tuition and room and board. | | | | learn to live without it, and before you know it you |
| Borrowing:If you choose not to save when your child | | | | have this nest egg that's ready for the children and |
| is young, it is likely that your child will have to borrow | | | | their college education. So just to recap, you're point |
| to help pay for college. For comparative purposes, | | | | number two was saving beats borrowing hands |
| let's assume you borrow $40,000 in increments of | | | | down - I agree with you 100%. |
| $10,000 per year for 4 years. Assuming a 6.8% | | | | Can you explain for me point number three which is, |
| interest rate and a 10 year repayment period, | | | | the tax system gives incentives to college savers. |
| borrowing $40,000 will ultimately cost your child | | | | What does that mean? |
| $55,200. | | | | Don: Yeah it sure does, there's something called the |
| Difference: The difference between borrowing and | | | | 529 Plan, which the government has set up and |
| saving is nearly $30,000 ($55,200 ─ $26,000 = | | | | that's the provision of the Internal Revenue Service. |
| $29,200). Thus, saving beats borrowing hands down. | | | | It says you do not have to pay taxes on money put |
| 3. The tax system gives incentives to college savers. | | | | in this particular college savings plan. Not only do you |
| Both state and federal laws allow families to earn | | | | not have to pay federal taxes, but you don't have to |
| tax-free interest on college savings. The following | | | | pay state taxes. |
| example illustrates the advantage of earning interest | | | | So what it means is this money accumulates without |
| tax free: | | | | any tax payments over this thirteen year period we |
| Assume when your child is born you invest a | | | | talked about. It's a substantial difference if you |
| one-time, lump sum of $18,000 in a state 529 plan | | | | accumulate money paying taxes every year versus |
| (see Points 4 - 6 below to learn more about 529 | | | | not paying taxes. |
| plans). By the time your child is ready to enroll in | | | | An example I like to use would be, if you set aside |
| college at the age of 18, you will have access to | | | | at age 0 when your child is born, $18,000. If you |
| $63,000 in order to help pay for your child's college | | | | have to pay taxes on that over a period of 18 |
| expenses. | | | | years, you'll have accumulated $43,000. If you do it in |
| If the same $18,000 were invested in a taxable | | | | a 529 plan with all the advantages inherited in that, |
| vehicle with the same rate of return as the 529 plan, | | | | you'll actually accumulate $63,000. So it's quite a |
| after subtracting the federal and state taxes that | | | | difference in your pocket, your out of pocket |
| would be due each year, you would have access to | | | | expense, and in savings in any way that's taxable |
| only $43,000 to help pay for college. | | | | versus the 529 plan which are non-taxable in the |
| The difference, which is essentially a government | | | | federal or the state level. |
| subsidy to promote college savings, is $20,000, all | | | | Karl: So really what it comes down to is there is a |
| else being equal. Furthermore, some states actually | | | | $20,000 difference in your example that would go to |
| allow deductions for contributions, making the 529 | | | | me and my child's education versus... |
| plan even more attractive to college savers. | | | | Don: Right, it's a government subsidy for saving for |
| 4. 529 plans are the most popular and convenient | | | | college basically. |
| way to save. | | | | Karl: Okay, so your point number 4 is 529 plans are |
| There is approximately $100 billion currently invested | | | | the most popular and convenient way to save. What |
| in state 529 plans. | | | | are 529 plans? |
| 5. Not all 529 plans are alike. | | | | Don: 529 plans are these government sponsored |
| Each state has its own 529 plan. Investment options | | | | savings plan, which are now by far the most popular |
| and fees may vary from state to state, so it pays | | | | way to save for college. I think there's like a hundred |
| to shop around. A couple of useful sites for | | | | billion dollars in these plans as of the current time. |
| comparing the different state plans are and | | | | They simply are I think the most convenient, easy |
| Most state plans have websites that include free | | | | way to save for college. |
| electronic college saving calculators to help you decide | | | | Karl: Now you say government plans, are they |
| how much to save in order to meet your saving | | | | federal or state plans for the most part? |
| goals. | | | | Don: The federal government puts in the rules as far |
| 6. The money saved in a 529 plan is not forfeited if | | | | as these tax advantages we talked about, but |
| the beneficiary does not go to college or gets a full | | | | actually the plans are set up within each state, they |
| scholarship. | | | | establish their own. So when they look at 529 plans, |
| Money saved in a 529 plan may be used to pay the | | | | you normally start looking at your own state plan |
| college expenses of other family members, including | | | | because of certain advantages as far as state tax |
| siblings, parents, cousins and stepchildren. The money | | | | deductions, there may be some scholarship benefits. |
| can even skip a generation and be used for a | | | | There's also a very good website called and I think |
| grandchild in the unlikely event that became | | | | it's worthwhile before one invests in one's own state |
| necessary. | | | | plan to at least go on that website and check some |
| 7. There is no right amount to save. It depends on | | | | of the provisions of other state plans to see |
| your financial situation. | | | | whether your state is offering the best deal for you |
| 8. Do not save for college at the expense of | | | | or whether you might do even better by going to |
| maintaining your normal lifestyle or your retirement. | | | | another state. |
| You don't want to short change the amount you set | | | | Karl: Okay, you just answered your point 5 which is |
| aside for retirement. If you run out of money, there | | | | not all 529 plans alike you should shop around. And |
| is no such thing as a retirement loan. On the other | | | | the website was collegesaving... |
| hand, it is relatively easy to get a college loan. | | | | Don: |
| 9. Two ways to save are:o Save what you can | | | | Karl: Sorry about that! Number 6, what if the |
| afford after taking care of family expenses. | | | | beneficiary doesn't go to college or gets a full |
| As was stated in Point 5 above, most state 529 plan | | | | scholarship? Now you know all of my children are |
| websites have free electronic college saving | | | | going to get full rides, so this is a complete waste of |
| calculators. Other websites, like finaid.org, have them | | | | time for me, but let's just pretend they're not as |
| as well. By using these calculators you can periodically | | | | special as I think they are! |
| check to see how well your savings are keeping | | | | Don: Well if you can't use any of your children, do |
| pace with college costs.o Set a target figure. A | | | | you have any nephews or nieces? I guess is my |
| number to shoot for is the tuition fee at the major | | | | question. |
| public university in your state. For a more ambitious | | | | Karl: I do, I do. Both of my sisters have kids, so I |
| goal, you might use the out-of-state tuition charge. | | | | have two nieces and three nephews. |
| This higher figure would also allow you to accumulate | | | | Don: Okay well, the way they've set up the rules is |
| enough savings to pay for a good part of the tuition | | | | you initially establish a beneficiary. If he or she does |
| cost at a private college. | | | | not go to college, has a scholarship, you can then |
| Most college saving calculators found on state | | | | move the money around to other beneficiaries, |
| websites automatically include information on the | | | | including your whole family: your cousins, your first |
| current and projected (in-state and out-of-state) | | | | cousins, or if you want to go back to school you can |
| tuition rates for the state's main universities. | | | | use it yourself. You can actually skip a generation and |
| 10. If you save in a 529 plan and later apply for aid, | | | | it could even go to your grandchildren, but we won't |
| you may be subject to a very light "penalty" in terms | | | | get into that right now! |
| of how much the amount you have saved will | | | | Karl: Well speaking of different generations my |
| increase your expected family contribution. | | | | parents have at times expressed an interest in |
| If the child's parents are the owners of the 529 plan, | | | | helping me save for my children's education. Is it first |
| they may be asked to contribute some of that | | | | of all typical for grandparents to want to get |
| money under the rules of the need formula. (There is | | | | involved? And if they want to, can they get |
| no such "penalty" if the plan is owned by the child's | | | | involved? |
| grandparents. See Point 12 below for more on | | | | Don: Yes. I read a recent pole that says two thirds |
| grandparents.) Let's look at the example in order to | | | | of grandparents would like to help their grandchildren |
| better understand. | | | | with college to some extent. A 529 plan is an |
| If you, the parent, manage to have $100,000 saved | | | | excellent option for grandparents. We haven't talked |
| in a 529 plan by the time your child is ready to start | | | | about the effect of the financial aid formula on these |
| college, the first $50,000 will not be considered at all | | | | savings yet, but there's kind of a light tax on savings |
| when calculating your child's aid award. (This is one of | | | | that would be held in the parents' name. If the |
| the ways the system rewards you for saving.) Only | | | | grandparents save the money for college, they're not |
| 5% of the second $50,000, or $2,500, will be | | | | part of the financial aid system at all. So one doesn't |
| assumed to be available to pay for college. In other | | | | even have to worry about that. |
| words, the amount of your need will decrease by | | | | The other advantage of grandparents is as they're |
| that amount. | | | | building up their estate and they move this money, |
| Thus, one could argue that by diligently saving | | | | none of it counts even though their the owner in |
| $100,000, you are ultimately worse off by $2,500. | | | | their estate. So it's actually a good estate planning |
| However, if you consider that you are very likely to | | | | technique as well. And farther down the line, they'll |
| have earned around $35,000 in tax-free interest over | | | | help their grandchildren, which I'm sure they really |
| the saving period, you will realize that by saving you | | | | would like to do. |
| are actually about $32,500 better off. | | | | Karl: Okay now we talked a little before about what |
| 11. There are other ways to save besides 529 plans. | | | | is the right amount to save. Now you threw out |
| To look into other options, it is best to consult with a | | | | some examples of $167 a month and I asked you a |
| financial advisor. | | | | question: what if I can't save that much, what should |
| Remember to choose an advisor who in very familiar | | | | I do? The other variable is I don't know how |
| with all applicable aid rules. The need formula treats | | | | expensive school is going to be when they get to |
| savings differently depending on whether the parent | | | | that age. Is there sort of a right amount to save or |
| or the child is the owner. | | | | how do you go about figuring out what the right |
| 12. Grandparents too can help through 529 plans. | | | | amount is? |
| Based on a recent poll, two-thirds of grandparents | | | | Don: The easiest answer to that is simply save what |
| say they are interested in helping to pay for their | | | | you could afford after you take care, as we talked |
| grandchildren's college education. It is worthwhile to | | | | about before your current living expenses and your |
| know, that money saved in grandparent-owned 529 | | | | retirement protection. If one wants to set a target |
| plans is not considered when calculating the | | | | figure, I think a reasonable one is the out of state |
| grandchild's aid award. Furthermore, | | | | tuition for wherever your flag ship public institution is. |
| grandparent-owned 529 plan savings are not counted | | | | In New Jersey they use rectors as an example; the |
| as part of the grandparent's estate for estate tax | | | | out of state tuition for a student that comes from |
| purposes. | | | | out of state and attends rectors is about $17,000 a |
| College Financial Aid: Pre-High School Saving | | | | year currently. If you take that and you inflate it |
| (transcript) | | | | over a period of time that ends up being thirteen |
| I've spent the last couple months videotaping myself | | | | years using the same 5-year-old example. $168,000 is |
| giving advice on how to take the SAT, but I know | | | | what you're facing way down the line. You'd have to |
| that getting a good SAT score is not all that you | | | | put aside about $450 a month to meet a target like |
| need to do to get into a good college. There's a lot | | | | that over that period of time. |
| you need to know about financial aid and admissions. | | | | So, some families can't afford it. If you could afford |
| While I'm not an expert in those fields I have some | | | | that, it's a very good number to shoot for because |
| friends who are and I recently had the opportunity | | | | then if your student stays in state that amount of |
| to sit down and talk to Don Betterton. | | | | money would probably pay for tuition, plus room, plus |
| Don is the former financial aid director of Princeton | | | | board and if they go to a private institution, it will |
| University. He was there for 30 years in that position. | | | | probably pay a good part of the private institutions |
| I got to know Don back in the late 80s when he | | | | tuition. So it's a reasonable target figure. It can be |
| was one of the assistant soccer coaches and I was | | | | expensive but if that's not possible, any amount you |
| on the varsity soccer team. Don and I have known | | | | save is better than not saving at all. |
| each other for a long time, he's a great guy and I | | | | Karl: Don, one last question on a topic that we didn't |
| asked him what I could do today before my kids are | | | | really cover I don't think in the last segment. Will I |
| even in high school to help make paying for college | | | | ultimately be penalized if I'm a good person that |
| easier when my kids finally do get to college. | | | | saves and does everything I'm supposed to when I |
| So I grabbed my video camera and sat down with | | | | get to that financial aid award when my kids get to |
| Don and hopefully you'll enjoy the conversation. | | | | school? |
| Karl: So Don I'm excited, I'm about to learn the | | | | Don: Yeah that's a really good question and I hear |
| twelve things I need to know about saving for | | | | that quite a bit. Am I penalized for saving? Whether |
| college for my children. Your first bullet is called | | | | it's in a 529 plan or any other form of savings the |
| putting aside money for college is a good idea, the | | | | financial aid formula is really fairly light on how they |
| earlier the better. My question for you would be, who | | | | treat savings. Let me give you an example: |
| is it a good idea for: me or my children? | | | | If by the time your son gets to college, you have |
| Don: Actually it's a good idea for both. What I like to | | | | $100,000 in some form or another savings, |
| do is compare "Savings vs. Borrowing" because if you | | | | investments, 529 plans, the financial aid formula first |
| don't save now the chances are your child is going to | | | | said you can reserve $50,000 that we won't even |
| have to borrow later on. So I have an example here, | | | | look at. So now they only look at $50,000 of your |
| depending on how old your children are. | | | | $100,000. What's called a tax rate on that, the |
| Karl: I have a 9-year-old, a 7-year-old, and a | | | | amount that's added to your contribution is 5%. So |
| 6-year-old. | | | | going through the math 5% of $50,000 is $2,500. So |
| Don: Okay. Well my example is based on a 5-year-old. | | | | you're contribution is now going to be $2,500 greater |
| So let's start with that. Thirteen years until college, | | | | because you have $100,000, so I think that's fairly a |
| you start putting aside money when your son is | | | | light treatment of the savings. As a matter of fact, if |
| 5-years-old. You put aside $2,000 per year over that | | | | the $100,000 gained some interest during the years, |
| thirteen year period; you've set aside $26,000 dollars. | | | | chances are you can simply pace some interest off |
| The interest accumulation over that period of time | | | | the top of it and never actually have to touch the |
| means you'll have $46,000 ready to go to college | | | | principal at all. So whether it's 529 plans or any other |
| when he's 18 years old. | | | | form of savings, it's a good idea enough that the |
| Let's say you don't do that, you don't put aside any | | | | financial aid system treats it fairly lightly. |
| money at all. You still need $40,000, now you have | | | | Karl: Awesome! Thanks Don I really appreciate your |
| to borrow that money. He takes out a student loan, | | | | time and your knowledge and your willingness to |
| graduates with $40,000 worth of debt. He has to | | | | share with me. |
| repay that at a 6.8% interest rate over a 10 year | | | | Don: Thank you. |
| period. Guess how much he'll have to repay? | | | | Karl SchellscheidtePrep |
| Karl: $55,200. (laughs) | | | | Copyright 2006 - All Rights Reserved, ePrep, Inc. |