School doesn’t have to be in the recent past, nor do readers need to have school-aged children to be exposed to constant reminders of all things back to school. With the back-to-school frenzy comes, fittingly, National College Savings Month. And, with the onset of next month, FAFSA applications will be open and in full swing. As a full-service accounting firm, we are pleased to partner with families to discuss their unique concerns and challenges, and to smooth the path to a financially-feasible college experience for their next generation. We at OFWF are privileged to provide insights into tax-advantaged accounts, credits, government programs and savings plans for which you are eligible. In the meantime, we encourage you to get to the head of the class and in front of the pack with the latest opportunities to meet your financial and family goals, without causing undue stress on your nest egg and undue strain on your personal relationships.
ABCs of 529s
The College Savings Plan Network (CSPN), which puts on the National College Savings Month each September, encourages parents to not miss out on many opportunities to sock away money for higher-education expenses. Notably, each state administers different 529 plans. Prepaid tuition plans have been characterized as methods of paying “for tomorrow’s tuition at today’s price.” Meanwhile, college investment plans are likened to Roth IRAs. These plans allow for accountholders to contribute after-tax dollars and to secure tax-free gains when the dollars withdrawn are used for “Qualified Higher Education Purposes.” Qualifying expenses apply to essential student needs during college – ranging from the obvious (tuition, room, board) to potentially overlooked supplies and ancillary needs (fees for processing and applications, books, computers).
In Nebraska, there are two direct-sold savings plans: the NEST® Direct College Savings Plan and the Bloomwell 529 Education Savings Plan. There are also two advisor-sold savings plans: the NEST® Advisor College Savings Plan and the State Farm® 529 Savings Plan. In Iowa, savvy planners can choose from the direct-sold College Savings Iowa and the advisor-sold IAdvisor 529 Plan. One can search for plans by name and manager and can then compare up to four plans at a time. Plans can vary in terms of state residency provisions, max contributions, asset-fee ratios, fees (such as for account maintenance), and contribution matches. This tool, available at the CSPN site, allows families to make an informed decision about savings accounts that is in their best interest.
Feel better about savings vehicles? Good! Now, let’s get one big step closer to pinpointing your needs. Parents and caregivers cannot adequately plan without having an accurate goal in mind. College savings calculators are available, which allow savers to derive ballpark estimates about the cost of higher education. They work by using a variety of inputs, such as current student age, college type (in-state public, out-of-state public, private), number of years to account for, and college cost inflation rate. The last input is tricky and, especially given current circumstances, panic-inducing. Don’t fret. The network suggests inputting between 6% and 7% (the average countrywide rate for tuition inflation).
The final total itself can be a source of dread but, here again, most families access myriad opportunities to finance their children’s higher education. And do not be bashful about enlisting the help of proud grandparents and family friends. One of the best gifts these loved ones can make is to contribute to 529 accounts. For instance, NEST® treats contributions to beneficiary accounts as “gifts” from a federal gift and estate tax perspective. At the time of this writing, contributions were eligible for gift tax annual exclusion – at $16,000 per beneficiary (or $32K for married couples, which may opt to “split” their gift contributions). As much as $80,000 may be contributed as non-taxable gifts in a given year, with the stipulation that no other gifts be made in the same year or the following four calendar years.
Credit cards are also getting into the action. Increasingly, companies are trying to cater to consumers’ needs by delivering on benefits that are more applicable to their day-to-day lives. For instance, the Upromise® credit card rewards program can link to borrowers’ 529 plans. Cash rewards are earned when making everyday purchases, such as groceries and dining. As an example, when linked to a 529 account, $10 a month in Upromise® rewards can add up to $3,500-plus over 18 years (at 5% interest). If a family spends $10K on cards that earn 2% on each purchase, that’s $200 annually to sock away. Accounting for 6% interest, by the time a child turns 18, more than $7,000 would be saved just through credit cards rewards programs that connect to 529 plans.
Brush up on FAFSA®
The sooner that the Free Application for Federal Student Aid can be filled out, the better! Submitting the application as close to the October 1 opening period can increase the odds of securing grants, scholarships and work-study aid. As the Office of the U.S. Department of Education reports, there are largely grants such as the Pell program that do not have to be repaid. Likewise, children’s academic merits or talents may make them worthy of scholarships awarded via nonprofits and private organizations. Federal Work-Study Programs allow for students to earn monies while working part-time, with pay based on when one applies, as well as the level of need and the school’s funding levels. The burden of student loans is no secret, and can be crippling. It is vital that borrowers understand the stipulations associated with various loan sources, and know what they are getting into.
There are considerable free resources available to parents and students who are facing down the prospect of completing the FAFSA® and obtaining aid. The official StudentAid.gov website instructs applicants to read all questions carefully before submitting, and to meet all FAFSA® filing deadlines. You can view these deadlines here. Furthermore, don’t assume that aid is not coming your way. It is very easy for important messages to get caught in spam folders. Speaking of which, it is vital that applicants maintain proper online hygiene. By that, do not share unique IDs or passwords even among those individuals that are assisting you with FAFSA® apps. Securely storing and shredding vital records or statements that are necessary to determine aid is also critical to avoiding scams and identity theft. And have we mentioned that resources associated with federal aid at all phases are free? We cannot overstate this. Avoid any emails or claims from organizations to help you get funds, lower your monthly loan payments or forgive student loans on the basis of COVID-19 hardship … for a fee. Resources are available at no charge to handle these and myriad other concerns and needs.
And the best resource of all as it relates to getting your children’s college savings and your overall financial house in order is right here at OFWF. Our seasoned professionals look forward to making this process seem a little less daunting, and to assuring that you don’t miss out on opportunities to grow your savings in the most tax-advantaged way possible (take a look at our write-up on educational credits here). We welcome your questions and call!