Financing education is a hot topic, with as many myths as there are facts. Some parents worry that if they save too much, they eliminate eligibility for free financial aid later. This is not the case for many families.
In fact, the benefits of saving for college can be substantial. Before committing to a long-term program, consider the following:
It’s cheaper to save now than borrow in the future.
A college savings strategy may reduce or eliminate the need to borrow later. A $250 per month contribution towards college savings earning 6% would grow to about $41,000 in ten years. Compare that to borrowing $40,000 for ten years. With a 6% interest rate, you would have 10 years of monthly payments of $444 with a total cost of borrowing over $53,000. Prudent planning and consistency can yield real benefits for families that save.
How do college savings fit in with Financial Aid?
There are two types of financial aid: need-based and merit based. Merit aid is awarded to students regardless of family income or assets for a variety of reasons: academic performance, athletic ability, other special talents or sometimes simply because a college wants to round out a class geographically. For need-based aid, colleges will generally weigh a variety of factors including family income and assets (cash, checking / savings balances and college savings, sometimes home equity or the value of a family business). This is where good planning comes in handy.
Who should be the saver?
Maintaining the ownership of a qualified college savings account under the parent’s name is more favorable in the financial aid process. The government assumes that parents will contribute a maximum of 5.64% of assets to education, whereas a student’s assets are assessed as high as 20%. Additionally, a 529 plan tax-free distribution used to pay for college expenses will not be part of the base-year income (like job earnings) that may reduce financial aid eligibility for next year.
As a result, families with modest household income are in position to reach college savings goals while still potentially qualifying for need based aid at many institutions. Saving for college is a good idea and will nicely complement need or merit based aid your student receives.
Your strategy for affording college will likely combine savings, merit and/or need-based aid, gifts from relatives, student or parental income from a job, free money such as grants or scholarships and, as a last resort, loans. No matter what a family’s financial situation, paying for college is best achieved with a longer-term plan and knowledge of the options.
Tip of the Month:
The tax year that ends prior to the beginning of your student’s senior year is called the “Base Year” for financial aid purposes. To maximize financial aid opportunities, be sure to transfer assets from the student’s name to parents name prior to the base year—that means before January 1 of the student’s junior year.
Sterling National Bank's Invite Education program can help you prepare for education expenses. Find out how by contacting your relationship manager today: 855.274.2800.