Last week, we discussed the topic of college savings with Gary Hoover  and Warren Smith . Today, we also have the pleasure of speaking with Peter Mazareas, Chairman Emeritus of the College Savings Foundation. The College Savings Foundation is a not for profit organization that is helping American families achieve their education goals by working with policy makers, media, and the financial services industry in support of education savings programs. As Chairman Emeritus, Peter had unique insight into the full scope of educational savings opportunities, and this first part of our chat I had the pleasure of asking him a few questions on how families can best save for college and what families can do today to improve their chances.
1. If you have young children and are thinking about how to save for their college costs, what are some of the best strategies today?
The first step is to start saving for college as early as possible. The best approach is to set up a weekly or monthly automatic transfer into a college savings account. Due to the generous tax free benefits and the fact that parents maintain control of a 529 Account s, saving in a 529 plan  is highly recommended. In addition to low minimums-as low as $15-, 529 plans offer a host of investment options ranging from FDIC insured savings accounts  to bond and mutual funds. All have age based portfolios where the level of risk is decreased steadily as the child approaches college age. If used for college all earnings are tax free and can be used for other children as changing beneficiaries is permitted. The following sites will be helpful in learning about 529 plans: www.collegesavingsfoundation.org and www.savingforcollege.com.
2. Before your child gets accepted into a college, one of the scariest thoughts is that they might not get into a good one. After your child gets into college, paying for it becomes one of the scariest thoughts. What can parents do right now to help their chances at getting some financial assistance?
Not much at this late stage. There are two types of financial aid. Need based and merit based. Need based is determined by the Federal government’s financial aid formula so parents who have children in college should fill out the the Free Application for Federal Student Aid (FAFSA) form and submit it to the college(s) to determine the Expected Family Contribution (EFC). Before filling out the FASFA form should use online calculators such as the Quick EFC (Estimated Family Contribution) Calculator to help assess these variables in advance of submitting applications and filing your FAFSA form.
It is important to know that the amount of aid one receives is primarily based on family income levels. Other factors such as the number of children in college and amount of savings may impact the amount of aid. Parent savings, however, is only assessed at 5.6% so there is minimal impact on financial aid. Example: if a parent saves $10,000 in a bank savings account, in mutual funds or in a 529 account only $560 will be the expected contribution to pay for the current year’s tuition. Saving is crucial step to lessen loans and long term debts and will have minimum impact on financial aid.
It is important to understand that all colleges use the EFC and thus the amount a family is expected to contribute is the same for public or private colleges and therefore in many instances the family contribution for attending an expensive private college vs. a public will be approximately the same and the financial aid package at the more expensive college will be larger. So parents/students should not decide on a college based solely on costs until they complete the FAFSFA form and receive aid packages from the various colleges.
Merit aid is awarded based upon the student’s academic performance. Top students generally qualify but it is at the sole discretion of the college. Many states award full tuition scholarships to their public institutions for students who achieve a certain grade point average.
A useful site for financial aid and scholarship information is www.finaid.org
3. Are there moves that parents should avoid doing right now?
One thing the parents/students should do is not to have any assets in the student’s name as student assets/savings accounts are assessed at a 20% rate as opposed to the parent rate of 5.6% by the financial aid office. So if a student has a savings account, Coverdale account or a UGMA account in their name accounts should be withdrawn and placed in parents or grandparents names. This, however, must be done before the student is a high school senior.
As mentioned above financial aid is based solely on income not on savings. So there is little parents can effectively do to increase the amount they receive in financial aid. Rearranging assets and taking on more debt will have minimal impact on the amount of aid.
Tomorrow, we’ll bring you part two.