Paying for college is very expensive, and at times it may seem overwhelming to imagine the cost. After all, the media is always reporting about the decreases in state and federal aid and how financial aid is not keeping up with the increases in tuition price. Still, the majority of college students receive some form of financial aid to make college more affordable than the “sticker price”.
Curious about how much college will cost five to ten years from now? You can project college costs which have historically been twice the rate of inflation. Current increases have averaged 5% to 8%. Cost projection calculators estimate how much college will cost you when your child is ready. You can access this feature on our website at nhheaf.org/calcs.asp. Remember, studies consistently have shown that the benefits of a college education far outweigh the cost. So don't panic. There are three basics for getting started:
Read our Financial Aid Insider publication to understand the financial aid process and available funding options.
Remember that although the cost of an education may seem high, the personal and monetary returns on that investment are great! Most students receive some form of Financial Aid to help offset the cost of attendance (COA). The COA is the amount budgeted for tuition, room and board, books, mandatory fees, supplies and any related expenses. The amount of financial aid a student is awarded is determined through the disclosure of parent and student income and asset information. That information is then subjected to what is called federal methodology; a formal name for the formula which takes into account parent and student income and assets and determines how much a family has available to meet college costs. The process is called the “needs analysis” and can only be done each year after the family has filed the FAFSA (Federal Application for Student Aid). The end result of this process will yield an EFC or “expected family contribution”; this is the amount the family is “able” to pay towards the cost of one year of college. Keep in mind that many families use a combination of savings, current earnings and federal parent and student loans to manage the cost of college.
The factors used in determining the EFC include: parent and student annual income and assets, family size, number of family members attending college and unusual circumstances. The Financial Aid awarded to meet college costs will originate from a variety of sources including the federal government, postsecondary institutions themselves, scholarships and private sources. Money is awarded in the form of grants (money that does not have to be repaid), low-interest loans (borrowed money that must be repaid), special merit or need-based scholarships (money that does not have to be repaid) and federal work-study programs (money earned through employment opportunities). Funding varies greatly from student to student and school to school. There are many tools available to help you estimate your EFC for planning purposes. Visit nhheaf.org/calc.asp for financial aid and EFC calculators.
All colleges that provide federal financial aid are required to provide a Net Price Calculator (NCP) on their websites. Net Price Calculators use Cost of Attendance and family financial information to estimate the amount of gift-based financial aid the student may receive; giving the family a better idea of the cost of college after financial aid is applied. Below are some important tips when utilizing a Net Price Calculator to obtain the most helpful results. Results of a Net Price Calculator are an estimate and only as accurate as the information provided. Therefore, when filling out an “NCP” be prepared with the required information such as tax forms, W-2s, and a list of assets for both parent and students. Not all NCPs are created equal, some schools have chosen to purchase more in-depth calculators and as such, results for some schools may be more accurate than others, so keep in mind to follow directions closely while reading all disclaimers as they can provide information on how accurate the estimate will be.
NPC's can sometimes be tricky to find on colleges' websites. Look under the Admissions and/or Financial Aid webpages. If you can't easily find it, you may want to Google the phrase “net price calculator” plus the name of the college or university you'd like to explore.
The financial aid process may seem complicated, but in its simplest form, it comes down to understanding five steps:
This information is for educational purposes only and should be only one of many sources you turn to for sufficient background about college savings options. Among the most comprehensive resources is savingforcollege.com. You may also enlist the support of an expert.
Though a financial planner is not necessary to establish a savings plan, an experienced financial planner may be able to assist you in creating a plan that incorporates all of your financial goals in relationship to your resources, risk and lifestyle. How do you find a trustworthy and experienced planner?
When searching for a financial planner, ask about credentials and seek an individual who possesses a special interest and knowledge in the area of Section 529 plans. Make sure the financial planner you choose has achieved certain designations in financial planning. Ask the planner what qualifies him to offer financial planning advice and whether he is recognized as a Certified Financial Planner™ professional or CFP® practitioner, a Certified Public Accountant/ Personal Financial Specialist (CPA/PFS), or a Chartered Financial Consultant (ChFC). If the planner holds a financial planning designation or certification, check on his background with the CFP Board or other relevant professional organizations. You can call the Board at (800) 487-1497 to obtain any disciplinary information about the professional.
You should also ask whether anyone besides you will benefit from the planner's recommendations. Some business relationships or partnerships that a planner has could affect her professional judgment while working with you, inhibiting the planner from acting in your best interest. The planner may also have relationships or partnerships that should be disclosed to you, such as business she receives for referring you to an insurance agent, accountant or attorney for implementation of planning suggestions. For more tips and strategies for selecting a financial planner, visit the SEC Web Site at sec.gov/answers/finplan.htm.
An Affinity Program creates brand loyalty by offering a rebate to consumers in exchange for buying certain products or shopping at certain retailers. These programs provide college savings incentives including contributions to a 529 college savings plan. Parents or grandparents, friends and siblings just register their credit cards with the affinity program and these programs track purchases at participating stores. UPromise is an example of an affinity program. Learn more at upromise.com. Often, investment companies that manage 529 college savings plans also offer rebates to customers. For example, New Hampshire's college savings plans (The UNIQUE College Investment Plan and the Fidelity Advisor 529 Plan) are managed by Fidelity Investments. Fidelity provides a rebate to its credit card customers in the form of funds directed to a friend or family member's Fidelity-managed 529 Plan account. Learn more at fidelity.com/unique. Affinity programs are a great way to supplement regular long-term investments.
U.S. Savings Bonds are backed by the full faith and credit of the federal government. When determining a family's Estimated Family Contribution, savings bonds are counted as an asset of the bond holder. Series EE bonds and Series I can be purchased at face value in digital form from TreasuryDirect.gov, the government's website for buying and redeeming bonds. Both Series EE and Series I digital bonds are purchased at face value and redeemed at face value plus interest. Series I bonds offer a fixed rate of return and a variable semiannual inflation rate combined. Series EE bonds earn a fixed rate of return. Within certain guidelines, U.S. Savings Bonds are federally tax-free for qualified education expenses. Visit savingsbonds.gov for current rates and more information.
A 529 College Savings Plan is a type of qualified tuition program that was established under Section 529 of the Internal Revenue Code. A college savings plan enables you to save money for a child's undergraduate or graduate level education in an individual investment account. College savings plans are established by states and typically managed by an experienced financial institution. Anyone can participate in a 529 plan regardless of income of the account owner and in most states, regardless of the age of the beneficiary. A 529 plan is considered an asset of the parent, and not of the student. Anyone can contribute to a 529 savings plan, up to the lifetime contribution limit, and there are no income restrictions. Savings plans earnings are based on the market performance of the underlying investments which typically consist of mutual funds.
When selecting a portfolio for your investment you have two options. An advisor-sold fund allows your trusted financial advisor to select a portfolio for you; as a result you will pay a percentage of sales commission. A direct-sold fund allows you to choose the portfolio of investments yourself with no sales commissions and lower fees. Contributions into the 529 college savings plan grow federal and state income tax free. All withdrawals used for qualified higher education expenses (tuition, fees, books, supplies, room and board) are exempt from federal and state income tax. Learn more at savingforcollege.com.
529 Prepaid Tuition Plans are guaranteed to increase in value at the same rate as college tuition. Essentially, by contributing to such a plan, you “lock in tomorrow's tuition at today's prices”. Prepaid tuition plans are broken into units (i.e. 1% of current tuition). You can purchase as many units as you wish. One unit will be worth 1% of future tuition costs no matter how much tuition prices increase. These units are in the name of a child and can be presented at participating institutions, including institutions that join the program after the certificate is purchased. A prepaid tuition plan can be transferred to another member of the family, including children, parents, grandparents, cousins, nieces, nephews, aunts, and uncles. Prepaid tuition funds can only be applied to tuition and fees. One consideration to cover the total cost of college would be to invest in both a 529 Savings Plan (for books, supplies, room and board, other college expenses) as well as a 529 Prepaid Tuition Plan (for tuition). Currently, eighteen states offer a prepaid tuition program. Learn more at savingforcollege.com.
Private College 529 Plans have no start-up fees, no maintenance fees, and no annual fees. Currently there are 276 schools in 39 states participating in the Private College 529 plan. Tuition certificates are issued representing a percentage of tuition purchased. Tuition certificates must be held for a minimum of 36 months before they can be redeemed. Just like other 529 plans, the Private College 529 plan is counted as an asset of the parent. Prepaid tuition plans are exempt from federal income tax, and are often exempt from state and local income taxes. Learn more at privatecollege529.com.
A Coverdell Education Savings Account is a tax-advantaged education savings account that you can establish for a child under the age of 18. Contributions (currently, a maximum of $2,000) are prohibited once the beneficiary turns 18. To qualify for the plan's tax benefits, the income of the account owner must fall within certain guidelines detailed at irs.gov in Publication 970 Tax Benefits for Education. This savings plan is also counted as the asset of the parent. Amounts deposited into the account grow tax free until distributed as long as they are used for qualified postsecondary educational expenses such as tuition, fees, textbooks, supplies, equipment, and room and board.
Roth IRA is another type of personal savings plan that offers tax benefits to encourage retirement and education savings. Contributions to a Roth IRA are not tax deductible, but if certain conditions are met, (i.e. distributions are not for more than your qualified education expenses and you only take distributions from your contributions) the distributions will be tax free. Contributions to your Roth IRA grow tax free. Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. However, you can take distributions from your IRAs for qualified higher education expenses (tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution) without having to pay the 10% additional tax.