College Savings Planning
One of the most common questions asked by families on the topic of "Saving for College" education sessions is "Why should I save for college - won't I be penalized in the financial aid process for doing so?" This section will explain the importance of saving for college to make a child's higher education more affordable at the time of enrollment, and how these savings plans can supplement financial aid - not replace financial aid.
Developing a College Savings Plan
A college education is one of the best investments in a child’s future. It is also one of the most expensive. If a family is able to begin planning and saving for college, they may be able to:
- Select the school that is the best academic and social fit for their children, knowing that they have savings put aside for their education
- Reduce their reliance on parent and student loans to finance their student’s education
- Reduce the stress typically associated with paying for a college education knowing that they have planned and saved for this moment
Savings plans compliment financial aid to provide a comprehensive college financing strategy. By starting a college savings plan, families will have more financial options when it is time for their child to enroll in a college or university. Developing a college savings plan involves four major steps:
- Estimating the 4-year cost of an undergraduate education;
- Understanding Financial Aid;
- Determining your savings goal; and
- Selecting a savings vehicle.
Estimating the 4-year cost
There are many online resources that calculate the projected costs of a student's future enrollment. The College Cost Projector (FinAid.org) is one such calculator that allows users to input the current total cost of an institution, the number of years until the child enrolls, and a tuition inflation factor. It then runs a calculation to give you the estimated costs for the student's Freshman, Sophomore, Junior, and Senior years.
In addition to these general calculators, there are many school-specific resources available to help you estimate costs. Each school is required to have a net price calculator. This calculator allows you to input your financial information to get a "net price" estimate. The "net price" is the total annual published cost of attending the school (sticker price) minus any scholarships or grants for which you may be eligible. By using these tools, you can estimate what your family would be expected to pay for your child's freshman year.
For more information on net price calculators, you can visit the College Board.
For more information on Notre Dame's Net Price, you can visit the Notre Dame Net Price Calculator.
Understanding Financial Aid
Financial aid policies vary by institution. Out of the approximately 6,900 accredited institutions of post-secondary education, less than 2% of these institutions share Notre Dame's policy of "Need-Blind admissions" and "Meeting the full demonstrated need." When creating financial aid packages, many institutions include private loans in addition to government loans, or they may "gap" (when the total amount in the financial aid package is less than the student's financial need). For more information on Notre Dame's financial aid policies, you can visit the Office of Admissions site.
The question of the impact of college savings accounts when calculating financial aid comes into play as it might impact the "expected family contribution" (EFC). EFC is comprised of two components, parent and student contribution. Each of those components can be further broken down into income and assets. A college savings account would be considered an asset. When calculating financial aid, a flat 20% of a child's asset is included in the student contribution. However, parent assets are treated much differently. First, there are certain consideration allowanced to protect parent's assets such as:
- Qualified retirement plans (e.g., IRA, 401(k), 403(b)
- Value of the family's primary residence
- Value of small businesses owned and controlled by the family
In addition, parent assets are assessed on a graduated system from 0% to a top rate of 5.64%.
Let's demonstrate how EFC can be derived using Family A who has $100,000 in non-retirement assets ($5,000 of which are student assets):
- Scenario 1 assumes that Family A does not have any savings specifically for college
- Scenario 2 assumes that Family A has $30,000 (of the $100,000) in a 529 savings account owned by the parents.
|EFC Generated From:||Scenario 1||Scenario 2|
|Parent Assets (Non-529)||$ 4,750||$ 3,250|
|Parent Assets (529)||$ -||$ 1,500|
|Student Income||$ 2,000||$ 2,000|
|Student Assets||$ 1,000||$ 1,000|
As one can see by comparing scenario 1 & 2, Family A did not experience any increase in Expected Family Contribution by using a 529 Plan to save for their child's college education. In fact, by doing so, they were able to enjoy the advantages of a 529 Plan such as federal tax-free growth and withdrawals. In addition, by using a 529 account, Family A was able to take advantage of their state's tax incentives. And now, when Family A is faced with a $30,000 payment that they have to make for their child's first year of college, they can take some of it from their current income, but they also have resources saved that they can use to give them more flexiblity in their household budget.
Those who have planned and saved have more options for their children!
Determine your Savings Goal
Most families can't save 100%; but families should save as much as they can. A common industry guideline is to try and save between 25%-50% of the child's costs.
Selecting a Savings Vehicle
There are many savings vehicles available to help you meet your needs. None of these options are mutually exclusive and can be used together to create a savings plan. You may decide to open multiple 529 plans, and use those with a Coverdell account or an UGMA/UTMA account to help pay for your child's college education. Its important to select the options that are the right fit for your family's needs. Please note that you may want to consult with a financial adviser or a tax professional to help you select a savings vehicle(s) that best fits your individual circumstances. The material provided on this site and through other University programs are meant to inform you of the various options and does not constitute financial advice.
For more information on various college savings vehicles please visit the College Savings Options page on this site.