Saving for college wasn’t a thing in my family. Most kids from my small town in rural Maine simply attended the cheap state university system and they didn’t accumulate debt like we see today. As a high school junior, I took a career interest survey to try figure out what type of job would be best suited for my interests and skills. Number one on my list was engineer…I had no idea what an engineer did so I moved on to my second choice. Pharmacist. That was easy since my father and grandfather were both Pharmacists and they both attended a private school in Boston. I applied to the same private school, got in, and enrolled without thinking about how much it would cost or who would pay for it. A 17 year old doesn’t think of money and in my case my parents didn’t think of it either.
According to the USNews and World Report, the average tuition and fees (2020-2021) for a private college is $35,087, $21,184 for public out-of-state, and $9,687 for public in-state. Students have been encouraged to take out loans to pay for their education which hit a record $1.7 Trillion in student loan debt in 2021. The average student debt is $37,691 and there is a 11.1% delinquency rate among all student loan borrowers. For students attending professional degree programs, the average student loan debt can easily balloon to over $200k or even $300k.
For my profession of choice (i.e., Pharmacy) the average student loan debt is estimated to be $179,514. With the mounting costs to attend college, a focused financial plan is needed for a student to land a professional degree program. Saving, investing, and financial aid hacking has become a focus for many parents or parents-to-be.
**Side note – You may not have children right now (enjoy the freedom!). This information is still helpful to think about if you ever do plan to have children. It may also be helpful if you plan to attend graduate school or start a new career as well.**
College Savings Plans
There are several different options for college saving.
Type of College Savings Accounts
- 529 Savings – A tax-advantaged savings plan that is run by each state. The savings plan has an investment option where the contributions grow tax-free in the stock market and the withdrawals are tax-free for qualified education expenses. The account is held in the parent’s name with the student named as the beneficiary. The invested money can be used at most colleges and universities. Some states even offer a tax credit on your annual tax returns.
- 529 Pre-Paid – The pre-paid plan permits the parent or student to pre pay tuition costs at today’s tuition rates. With the average cost of tuition rising year over year at greater pace than inflation, this is seems like a good deal. However, the funds are extremely limited since they are locked into to specific institutions.
- Coverdell Education Savings Plan (formerly Education IRA) – An educational savings account created by the US Government that is tax-deferred and limited to a $2000 maximum annual contribution. This account is a relatively unpopular savings plan (compared to the 529 Savings Plan) given the limitations of contributions and complicated taxation rules upon withdrawal.
- UTMA/UTGA Custodial Accounts – Uniform Transfer to Minors Act (UTMA) and Uniform Gifts to Minors Act (AGMA) are savings or investment accounts that are setup by the parent and transferred to the student tax free upon legal age. The UTMA can be transferred up to 25 years of age and the UGMA matures at 18 years of age. These are basically accounts to transfer wealth to a child without the need of a trust.
- Savings Account – Regular old savings account that the parent can save money in as they do for any other major purchases.
Financial Aid
There are two main types of financial aid applications used in the United States. The information shared on the applications is used to determine the financial need and the expected contribution by the family.
FAFSA – The Free Application for Federal Student Aid (FAFSA) is the form completed by parents/prospective students to determine eligibility of financial aid. The form collects information related to parent/students assets, income, and various other factors to determine financial need. The form is used by public universities and private institutions that use federal aid programs.
CSS Profile – The College Scholarship Profile (CSS Profile) is similar to the FAFSA but is used by many private universities to determine financial aid eligibility for the student. The CSS Profile is a more comprehensive look at the family assets and considers a broader range of assets vs. the FAFSA.
While may people assume they won’t qualify for any financial aid, most college savings experts agree that the application should be filled out. Educational institutions use the information shared on the FAFSA and CSS Profile to determine the Expected Family Contribution (EFC) which is now called the “Student Aid Index (SAI)”. You will see the two terms used interchangeably.
College Saving Hacks
Open a 529 SAVINGS BEFORE you have kids – If you don’t have kids but you are planning to have kids then you can open up the 529 savings plan today! The advantage of opening a 529 savings plan as soon as possible is to take advantage of more years of compounding. Just put your name down as the beneficiary and change it later to your child’s name.
Open a 529 SAVINGS in another state – Some state 529 savings plans have very high fees and limited options. You can open up a 529 savings in any state you choose and use the funds on any college…you don’t need to use the funds in the state that you opened the 529 savings plan.
Minimize income two years before the FAFSA – This may be controversial to some. The FAFSA has a “look back” period of two years at the time of completion. That is, your earned income from two years prior will be used to determine financial need. If you happen to take a sabbatical two years before your child heads off to college then you would effectively show ZERO dollars of earned income. This important when you consider that up to 47% of the parent’s net income is expected to pay for college (50% of the student’s income).
Liquidate savings accounts before filling out the FAFSA – Again…another controversial hack. The FAFSA views existing savings and investment accounts as available to contribute to your child’s college expenses. The FAFSA does not consider home equity though. Some creative parents drain their savings and investment accounts and pay off the mortgage in an effort to have low account balances thus improved eligibility for more financial aid. Plus having a paid-off mortgage is always nice!
Don’t have any accounts in your child’s name – The last of my controversial hacks…I promise! The FAFSA uses an overly complex formula to determine financial aid need. One of the factors used to determine aid is the assets held in the parent’s name (see liquidation hack above) and the assets held in the child’s name. The EFC formula assumes college will be paid for with 5.64% of the parent’s assets (above $10k) and 20% of the student’s assets. A simple hack is to have no savings or investment accounts (UTMA/UTGA) in the student’s name and keep everything in the parent’s name. (Just use the Cash App to send them money when they need it) Any money that students do earn can simply be placed into their Roth IRA since retirement accounts are not counted as assets on the FAFSA.
Spend the 529 SAVINGS in the 2nd half of the Junior year – When money is removed from the 529 savings account it is viewed as an asset of the student and could reduce their financial aid. However, the two-year “look back” is still applied so if you wait until the 2nd quarter of the student’s junior year to spend the 529 money then it won’t show up on a FAFSA application.
Open 529 SAVINGS account in a grandparent’s name – The FAFSA only considers assets held by the parent and student so if the 529 is opened by a grandparent then the account won’t be considered an asset.
Helpful Resources
What is my approach to College Saving?
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I contribute monthly to 529 Savings Plans for both my kids.
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I invest the money in the most aggressive fund available to achieve the maximum growth potential.
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I use an out of state 529 Savings Plan (New Hampshire) as my main 529 Savings accounts since the fees are low and it has good historical fund performance.
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I also use an in-state 529 savings plan for the tax credit on my state taxes. Not every state has this benefit.
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Any money earned by my child is deposited into their Roth IRA and not into a savings account. Retirement accounts do not count as an asset on the FAFSA.
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I plan to liquidate my savings accounts two years prior to my child’s first year in college to pay off my primary mortgage.
