529 Funds and Financial Aid
Money contributed to 529 funds will affect your child¡¯s eligibility for federal financial aid, but not by as much as you might think. Rather than having the entire amount of your 529 fund count as additional income, only a small percentage is considered. This means that you won¡¯t get as much financial aid if you have money saved up in 529 funds, but it¡¯s still worth it to save all you can.
529 Funds
If you¡¯re like many parents, you¡¯re concerned about the rapid yearly increase in college tuition. One way to attempt to keep up is by investing in 529 funds with 529 plans. These investment plans allow you to invest money earmarked for educational purposes without having to pay taxes on the increase.
Good 529 funds will allow you to change beneficiaries so that in case your child chooses to not go to college or doesn¡¯t need what you¡¯ve saved up, you can use the money for your grandchildren, nieces or nephews, or yourself.
Gift Giving and 529 Funds
Let relatives know when you open 529 funds for your children. Contributions to the college investing plans make great gifts for young scholars. By giving to a child¡¯s college investment, your relatives will be giving much more value than the dollar amount they choose to contribute.
Last Minute College Investing
If you have put off college investing until the last minute, don¡¯t jump right into 529 funds. If your child is in the last years of high school, you need to put your money someplace much more secure than the stock market. Look to bond mutual funds for moderate growth with little risk. If you find that what you¡¯re able to save doesn¡¯t make much of a dent in you child¡¯s college bill, look for other ways to reduce the costs of college. Scholarships are available from a variety of sources from fast food restaurants to bowling associations. Look into financial aid offered by the school. Also look at student grants and loans. If all of these don¡¯t add up to the sum you¡¯re looking for, consider choosing a less expensive college or starting off at a junior college with the intention to transfer to the dream college when it is more realistic.
When to Not Use 529 Funds
Of course you want the best for your kids, but don¡¯t sacrifice your own retirement to contribute to their 529 funds. There are grants, scholarships and low-interest student loans available to help pay for college. There are no such grants, scholarships or loans available to help you pay for your retirement. Only contribute to a 529 plan after you have reasonably high contributions to your retirement plans.
Who Gets the 529 Money
Don't worry that your children might blow their 529 funds on wild college parties. When you open 529 funds for your children or young relatives, you have control of the money in the account. This means that even when the student turns 18 you¡¯ll decide how the 529 money is spent.
Think Outside of the State
Don¡¯t limit yourself to the 529 funds offered by your state. You can enroll in a 529 fund offered by any state. Because state 529 funds can be used to bankroll education in any other state and vary in terms of rules and regulations, it makes sense to look around to find a state that offers a low-fee plan that meets your needs.
Coverdell ESA
Consider opening a Coverdell ESA for additional college investing. Formerly called the Education IRA, the Coverdell ESA is an investment vehicle that is exempt from income taxes as long as the funds are used for educational purposes. The maximum contribution to a Coverdell ESA is $2,000 per year for each account open. You can open a separate account for each of your children if you want. When they turn 18, however, they are given control of the money. They still have to use it for educational expenses, but how they do so is their decision. Besides college expenses, money in a Coverdell ESA can be used to finance elementary and secondary school costs including uniforms, transportation, and study materials.
Dollar Cost Averaging
Take advantage of the benefits of dollar cost averaging. Instead of investing a large sum of money all at once into your 529 college investing plan, invest in regular increments. By investing in smaller portions over time, you will buy into an investment package at a variety of prices. Some of them will be low, and some high. By doing this, you reduce the risk of investing all of your 529 money at a high rate. Over time, your investments will average, raising your chances of getting your best return.