Make the Most of College Savings | 02.26.13
February 25 – March 2, 2013 is America Saves Week, and to kick things off, student loan giant Sallie Mae released a national study on how Americans save for college. In “How America Saves for College: 2013” the statistics show that although most families are optimistic about their college savings, few are taking advantage of their options today. According to the study “Most college savers remain optimistic about their ability to save and plan to increase their savings in the next five years, though two-thirds don’t have a plan to achieve their goals.”
How Families are Saving
Much of the data has been compiled into an infographic, which shows a variety of ways families save, and the types of accounts they’re using. Of the families saving for college, only 27% choose 529 college savings plans. Other savings vehicles include general savings accounts, checking, investments, and even retirement accounts.
Best Ways to Save
Savings in the student’s name is assessed at a much higher rate than parent savings when applying for financial aid. While a maximum of 5.6% of parent assets count against a family, a whopping 20% of a student’s assets are used in financial aid calculations. When possible, keep funds out of the student’s name, and take advantage of incentivized savings vehicles over checking accounts, for example.
529 College Savings Plans
529 College Savings Plans are good options for families to cover college tuition costs. On the plus side, these parent-owned accounts are tax exempt for qualified college expenses and are in parents’ names. The downside is that funds can typically only be used on tuition and room & board. Learn more about college savings plan options and how 529 plans can affect financial aid.
There are some advantages of saving for college using a Roth IRA. While using retirement accounts for college savings is not always recommended, it can be a good option in some cases. For example, funds in a Roth IRA are not included in any financial aid calculations when applying to colleges, whereas 529 assets would be assessed at 5.6%. However, any withdrawal from a Roth IRA that exceeds the amount initially deposited would be subject to taxes, potentially decreasing the benefit of this savings option. For families that choose to save using a retirement account, make sure it does not come at the expense of retirement savings! Retirement is more expensive than college and college savings should come in addition — not instead of — retirement goals.
College Rewards Programs
There are a few types of rewards programs that allow families to earn cash for college. Some Upromise® is another helpful rewards program that provides cash back on everyday spending. Upromise rewards can be used to invest in 529 accounts, or even pay down student loans. What’s great about this program is that it’s available for both parents and students.
There are a lot of ways to save for college, and which option to use depends on your own family’s circumstances. If you’re unsure of the best way to plan for college expenses, you may want to consult a financial advisor to find the best options for your family.
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