While it makes no sense to try to make less money to receive more financial aid, it does make sense to make sure your child’s savings accounts are titled properly. For example, 20% of the assets in accounts owned by the child, such as The Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, are expected to be used annually toward college costs. However, a max of only 5.64% of the assets held in a parent’s name is expected to be used. Even better, none of the assets owned by a grandparent are expected to be used for the child (since there is no place to designate this on the FAFSA form). While higher-risk investments may be acceptable when you have a decade or more left until you need the money, as you get closer to actually needing to withdraw funds, consider moving towards less-volatile assets. Age-based accounts in Section 529 plans automate this process, making them a great option for parents who have limited time or investment knowledge. The American Opportunity Tax Credit (formerly known as the Hope Scholarship) is open to individuals with adjusted gross incomes of $90,000 or less ($180,000 if married filing jointly) and provides up to $2,500 per student annually. The Lifetime Learning tax credit pays up to 20% of the first $10,000 in higher education costs and is open to individuals with adjusted gross incomes of $69,000 or less ($138,000 or less for joint filers). Whether or not you think you’ll ultimately borrow money through programs like the PLUS loans, it is still important to fill out a FAFSA form. This is the basic form used by most schools’ financial aid offices to determine what you might be eligible for. The worst that can happen is they say no. Understanding proper investment selection and using accounts that are meant to combat inflation, such as prepaid tuition plans, are crucial to making sure a college education stays within reasonable reach. These may be fun and unique investments, but it’s best if they’re part of a broader, more diversified portfolio. Aside from the fact that most of these investments miss the tax-advantaged status other college accounts enjoy, they also can backfire as often as not. With less than 20 years until you need your college funds, stick with the tried and true. Choose simple investments that get the job done, and avoid investments never meant for college planning. While it may not seem like it has a huge effect, an extra 2% in fees may decrease a portfolio’s ending value by up to 40% over 25 years. Excessive fees, even on a well-performing portfolio, will reduce your earnings and increase the amount you’ll have to save to reach your college planning goals. The first step in choosing the right college account is to get your vocabulary nailed down. You need to know what the different accounts are and their basic features. Familiarize yourself with the types of accounts used to save for college, such as 529 plans, Coverdell ESAs, Roth IRAs, UTMAs, UGMAs, and trusts. What makes this mistake so huge is the fact that most parents typically do this sometime between ages 40 and 60. That leaves a short amount of time to make up the depleted funds before retirement kicks in. If you find yourself on the fence with the decision to raid your retirement plan, just remember this tidbit of wisdom: You’ll always have an easier time getting a student loan than a retirement loan. The most important first step, one you should start today, is calculating what your future cost will be. This, in turn, will allow you to calculate what you need to save each year to get to that goal. Now, just because a college savings calculator tells you that you need to save $250 per month doesn’t mean you have to do that or nothing. But, by knowing the number, you stay aware of how every dollar is spent. Even though you might only be able to save $100 per month, knowing your target number will help you to be wise with extra cash when you come across it.
