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Creating A College Savings Plan

Preparing for your child’s higher education can never begin too early. The earlier you start, the more options are available and the longer your money has to grow. Paying for college seems to get more expensive every year. If you have a child who you hope to send to college—either soon or down the road—you may have considered how you will afford to pay for their higher education.
 

Current tuition costs in Wisconsin ranges from $9,273 for public in-state tuition at University of Wisconsin - Madison to $52,858 at Beloit College. Tuition in Illinois is costing even more at $12,254 to $58,227 each year. The total costs, no matter where they attend, (even at today’s rates!) might seem alarming.  

How (and When!) to Create a Savings Plan


For many parents college may seem like a long time away but it’s never too early to begin saving. In fact, the earlier you start, the more options are available to you, and the longer that nest egg has to grow.  To get a better idea of what the future college costs might be for your family, here is an independent website: www.savingforcollege.com to estimate college costs and savings goals for your family.

These days, paying college tuition often takes every source of potential funding available. Opening and contributing to a 529 savings plan account is a great place to start. Reasons? The restrictions are few, and the potential benefits can be significant, including certain tax advantages, potential minimal impact on the financial aid available to the student, and control over how and when the money is spent.

There are many ways to save for college; custodial accounts (Uniform Gifts to Minors Act {UGMA]/ Uniform Transfers to Minors Act [UTMA] accounts), Coverdell Education Savings Account (ESA), 529 savings plans or setting money aside in a taxable account.  Most states have established state sponsored 529 college saving plans to encourage college savings on a tax-favored basis. Wisconsin’s college savings plan is called “Edvest”, and you can obtain additional information about this plan at www.edvest.com. Illinois’s college savings plan is called “BrightStart”, and you can obtain more information about this plan at www.brightstart.com.

529 College Savings Plans


The most popular vehicle for college savings is the 529 savings accounts.  They have significant benefits for both parent and child. They offer various investment choices, and contributions to these accounts can also reduce your state tax burden. Wisconsin residents can claim contributions of up to $3,560 as a tax deduction, while residents of Illinois can claim contributions up to $10,000 as of 2022! Additionally, as the account grows, all interest earnings are sheltered from federal taxes, as long as they are used for qualifying education expenses. Another benefit, anyone, parents, children, grandparents, relatives, and friends can contribute. 

In addition 529 savings plan can be used before college age as well if needed, to help pay for qualified education expenses at the elementary through high school levels, or for college-level and beyond. At the college or graduate level, 529 plan proceeds can be used for tuition, fees, books, supplies, approved study equipment, and room and board for a full-time student at an accredited institution.

529 savings plans differ by state, therefore speaking to a financial professional, like a First National Investment Executive, can help you find the right one for you. For more information on 529 savings plans, including restrictions and details on qualifying expenses, check Overview of 529 Plans.

Start Early to Take Advantage of Compound Interest


Starting early with saving for college doesn’t just mean that you have more years to save. Due to the compound interest of most college savings accounts, the difference in investment total returns can be drastic. Consider the effects of compound interest when starting at birth for eighteen years.

With a 5% return, an initial investment of $2,000.00, and saving $200.00 a month, after eighteen years you will have saved roughly $74,000.00 . To find out how much you could earn and save, check out this Compound Interest Calculator from Investor.gov.

Fill in the Gaps to Make College Affordable


Life happens, maybe you started saving late or your child’s top college choices are coming in higher than you expected, or you just have a little bit of gap between your savings and the expected costs that you will need to cover. Regardless, there are many alternatives for parents to help them pay for college, as well as reduce overall expenses. Here are a few major resources.

Apply for Scholarships and Financial Aid


In your senior year of high school, students with good grades and those who participate in certain activities or work (or whose parents work) for certain companies may qualify for a number of third party scholarships. These scholarships vary widely in dollar value and qualification requirements, and finding the right ones for your student can be daunting. A good place to start is to work with them to make a list of their strengths, passions, and connections to private organizations. Browse scholarships by state on Scholarship America’s website to get an idea of what might be available to you. And don’t forget to speak to your high school guidance counselor for ideas, as well. They might have some good tips for local scholarships!

Additionally, most students will qualify for financial aid through both their school and the federal government, in the form of scholarships and grants (money you do not need to pay back), student loans, and federal work study programs. In fact, nearly 84% of college freshmen will qualify for some kind of assistance. All major institutions of higher learning will have a dedicated financial aid office that will work with you and your student to find out how much, and what forms of aid, they can receive. However, for your first year in college it is a good idea to apply before you commit to a college, as your aid offer may vary widely from school to school, and knowing the out of pocket costs can help you make your decision.

To apply, you will need to fill out a FAFSA Form (Free Application for Federal Student Aid), which will require you to create an account if you are a new user. Many schools use the FAFSA system to determine how much aid you will receive from them as well, so it’s an important step to complete. The deadline for completion is usually June 30, for receiving aid in the coming school year. For more on how the student aid application process works, visit the Federal Student Aid website.

Take AP Classes and College Courses in High School


Another way to reduce the out-of-pocket costs of tuition is simply to reduce the number of courses you and your child will need to take in school. 

By taking Advanced Placement (AP) classes in high school and then taking AP exams, students can earn college credits for achievement in certain subjects. In fact, there are 38 AP subject exams to choose from. AP courses are free, however you will need to pay for the exam (currently $96, though some aid is available). The upshot is that for every score of 3 or higher, you and your student could save hundreds or thousands of dollars in tuition. Most, but not every college accepts AP credits; use College Board’s search tool to see your chosen school’s policies.

Many high schools also offer students to take college classes during their junior and senior years, to get their foundation coursework out of the way—and for free. Schools often partner with local community colleges, and these classes can count as both high school and college credit. Check in with your guidance counselor to see if your school has a dual-enrollment program.

Consider Community College First


We hear this all the time, but it bears repeating: Not every student needs to attend college. And it’s equally true that not every college student needs to start at a four-year institution. Community college can be an excellent stepping stone for students, and can have particular benefits if you or your student:
  • Isn’t sure about their future plans: where they want to attend school or what they wish to study
  • Had lower grades in high school and is looking for a reset
  • Plans to attend a four-year college that has a transfer agreement with a local community college and is looking to save money on tuition or housing costs
  • Is looking to save money on tuition or housing, even if they don’t have a second school in mind yet
  • Their career might not require a four-year degree

According to Saving For College, spending your first years at a community college could save $30,000 in combined college costs each year. Additionally, community college graduates might have additional scholarship opportunities, as many colleges set aside special funds just for transfers. Remember, at the end of four years, everyone, even transfer students, will come away with the same degree.

What happens to the savings if your child doesn’t go to college?


As mentioned above, not everyone needs to go to college—and not everyone will. If you are worried about shoe-horning your child into a plan that they might never use, keep in mind you may have other options. Here’s the lowdown on what happens if your kid decides not to pursue higher education:
  • You can change the 529 account beneficiary, without any tax repercussions. This includes siblings and step-siblings (including foster and adopted), nieces and nephews, aunts and uncles, parents and step-parents, in-laws, and first cousins. 
  • You can also change the beneficiary for Coverdell Education Savings Accounts too.
  • You can use 529 savings accounts to pay for up to $10,000 in student loans for a sibling.
  • You or your child can use the funds for something else, taking the accompanying tax penalty. As Experian explains, using 529 funds for non-qualifying expenses “will result in a 10% penalty tax on the money you take out. Plus, you'll be responsible for federal and state income tax on the earnings.”
  • You can simply wait—maybe they’ll change their mind. If not, the funds in a 529 won’t expire and can ultimately be passed on to their own children.
  • Per the IRS, if your child has a Coverdell account, when they turn 30 their funds can be (and need to be) distributed to them—but they will be taxable.

Start Saving Today


Even if your child is heading off to college soon, it’s not too late to begin saving. But it’s important to start as soon as you can. With the average cost of tuition in private four-year colleges in Wisconsin and Illinois reaching over $30,000 a year (and that’s not counting the additional $2,000 in spending money your student will require each year!), the more you save, the more you can spare your children the burden of student loan debt. And it’s not hard to get started!

At First National Bank and Trust we offer a wide variety of college savings options to help you save for your child’s future education expenses, from custodial UGMA/UTMA plans to 529 and Coverdell Education Savings Accounts. Don’t wait—contact an investment advisor today to create the right college savings plan for your family. 
 
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