The latest report on college costs published by the College Board brought some good news: The increases in tuition and fees for the 2014-2015 academic year were lower than the average annual increases in the past 30 years across all sectors included in the study. Yet even though college price increases are not accelerating, the report's authors affirmed that, in real terms, college costs have been rising for decades. For instance, the report, "Trends in College Pricing 2014," revealed that the inflation-adjusted average published price for in-state students at public four-year universities is 42% higher than it was 10 years ago and more than twice as high as it was 20 years ago. In the private nonprofit four-year sector, the increases were 24% over 10 years and 66% over 20 years. Given this reality, it is easy to see why devising a plan to pay for college is a major stressor for many American families.
Underlying that anxiety are numerous misconceptions about the financial aid process and how a family's savings might affect a student's eligibility to receive aid. Further, there also seems to be a general lack of knowledge about college savings vehicles, specifically 529 college savings plans -- how they work, and the many benefits they have to offer families struggling to juggle multiple financial goals.1 529 plans have altered education planning in much the same way that the 401(k) altered retirement planning. A unique combination of features -- high contribution limits, professional asset management, account holder control of assets, flexibility in transferring the money, and perhaps most important, generous tax advantages -- have solidified the 529 plan's position as a leader in the education planning world.
Test Your Knowledge
Here's your chance to test your knowledge about college planning and 529 plans. We hope that the information shared here will shed new light on some of the details of the process.
1. What form do all colleges require of students applying for financial aid? _____ CSS Financial Aid PROFILE _____ FAFSA _____ EFC
Answer: FAFSA. Any college or university that awards federal student aid requires the Free Application for Federal Student Aid (FAFSA). For the majority of colleges this is the only aid application required. The CSS Financial Aid PROFILE is required by some private colleges for assessing eligibility for the specific college's institutional aid dollars. The Expected Family Contribution (EFC) is a number calculated by the financial aid forms.
2. Saving for college in a 529 college savings plan negatively impacts eligibility for financial aid. _____ True _____ Maybe, but often the effect is minimal in the financial needs-analysis process _____ False
Answer: Maybe, but often not enough to worry about. The value of a 529 savings plan account set up by a parent or legal guardian is reported as a parental asset on the FAFSA and only increases the EFC by a maximum of 5.64% of the total account value. 529 plans and Coverdell Education Savings Accounts tend to be two of the better options for saving for college without jeopardizing financial aid. Income is generally more of a determinant of need-based financial aid eligibility or lack thereof.
3. Assets held in a 529 college savings plan can be used to pay for what type of school? _____ Four-year college or university _____ Two-year community college _____ Qualified trade school _____ All of the above
Answer: All of the above. With a 529 savings program, you can use your account at any accredited college or university in the country (and some outside of the country).
4. What happens to the 529 college savings funds if the student does not go to college? _____ The money can be used by another family member to pay for qualified expenses _____ The federal government will seize the account _____ Nothing _____ The plan will be declared void, and the money returned to the plan owner Answer: You may generally change the beneficiary. That money can be used by a sibling, cousin, or other family member for qualified higher education expenses, without penalty.
5. 529 assets held in the grandparent's name are shielded from the needs-analysis process. _____ True _____ False
Answer: True. Assets saved in the name of a grandparent are not reported on the FAFSA and do not typically count toward the EFC. Caution: Distributions from a grandparent-owned 529 plan used to pay for a student's college expenses generally weigh heavily in the federal needs-analysis process and are typically counted as student income on the following year's FAFSA form, with an assessment rate of 50%.2
6. 529 plan distributions from a parent-owned 529 account do not increase the family's EFC. _____ True _____ False
Answer: True. Unlike distributions from a grandparent-owned account, distributions from a parent-owned 529 plan that are used to pay for a dependent student's college expenses are not reported on the FAFSA and do not typically count as income in the federal needs-analysis process.2
7. What is assessed most heavily in the federal financial aid formula for dependent students? _____ Student's income _____ Parent's income _____ Student's assets _____ Parent's assets Answer: Student's income is generally assessed at the highest rate. The federal formula considers up to 50% of a dependent student's income as being available to pay for college. Here are the approximate rates for the primary financial resource categories that are assessed in computing an EFC: • Student's income Up to 50% • Parent's income 22% to 47% • Student's assets 20% • Parent's assets 2.6% to 5.64%
8. Federal loans tend to be the most common type of financial aid used for the education of dependent undergraduates. _____ True _____ False Answer: True.
For many families, the lion's share of financial aid is in the form of federal loans often supplemented by private loans, particularly when incomes are above a certain level and many need-based grants have been ruled out. Important caveat: If you combine all grant/scholarship aid dollars from all sources for all undergraduates, the amount would exceed the total federal loan dollars. Federal loans constituted 34% of total undergraduate student aid in 2013-14, according to the College Board. How did you do? Hopefully this information has helped you to better understand the financial aspects of college planning -- in particular the powerful but somewhat complex 529 college savings plan. To learn more about 529 plans and selecting the right plan for your situation, contact a qualified financial advisor. For more on the financial aid process, the following organizations offer ample, free information: • The College Board: Call your regional office or visit collegeboard.org. • FinAid: Visit http://www.finaid.org. • U.S. Department of Education, Federal Student Aid Information Center: Call (800) 433- 3243 or visit www.fafsa.ed.gov. Source/Disclaimer: 1 Investing in 529 plans involves risk, including loss of principal. Before you invest in a 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. 2 Note that some private colleges may treat the needs-analysis process a little differently from what is reported here, and generally the comments in this document apply to the federal needsanalysis process. Individual situations will vary.
The College Board, "Trends in College Pricing 2014," November 13, 2014.
Wealth Management Systems Inc., "Increasing 529 Sales & Savings Rates: The Role of Personalized Planning Tools and Education: Part 2," June 2015.
The College Board, "Trends in Student Aid 2014," November 13, 2014.
Forbes, "How Much Do You Know About a 529 Savings Plan? [Quiz]," June 23, 2015.