Q: What are some ways to save for college and get the best use of the money?
A: Many people make common mistakes in how they save for college.
Because they don't understand tax implications or how the government calculates financial aid, well-meaning individuals find themselves frustrated.
One common mistake is putting a college fund in the student's name.
This is not wise because the financial aid formula calculates parent funds differently than student funds.
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One of the many components that make up an Award Letter is the student contribution.
In addition to scholarships, grants, parent's contribution, the student is expected to add to the financial responsibility of their college education.
If parents place their money in the student's name, the student would be expected to contribute at the rate of 35 percent for the first year of college.
If those same funds were in the parent's name, they would be asked to contribute at a rate of 5.6 percent.
Another common mistake is spending the money at the wrong time.
Let's use the example of a student saving for a car for college.
They have saved $7,000 for a car over two years and plan on buying it right before they go to college. Seems like a good plan.
But, if the student shows $7,000 in their savings account after Dec. 31 of their senior year, the government formula will expect a large portion of that to go for college expenses.
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The student can no longer afford the car they wanted.
If the student would buy the car in the fall of their senior year in high school, the savings would not show up on the FAFSA in January and they would qualify for more aid and have their car, as well.
An excellent way to save is in the form of a life insurance policy.
If the student does not go to college, the fund is still there and growing.
If the child goes to college, the money can be withdrawn tax-free. There are also no tax implications of any kind while the individual owns the policy. And, there are no tax implications when the owner dies and passes the fund on to the child. A financial planner can arrange a life insurance fund for you. The owner selects where the money is invested and it can be invested conservatively in bonds or at a higher risk in the stock market. Life insurance is not claimed on the FAFSA toward the financial aid formula, no capital gains tax, and no probate expenses.
Knowing how the system works is crucial to efficient use of your money.
