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$5 a day keeps the college loan sharks away

Locations: Opinion Published

Chances are, if you’re one of the proud parents of a recent graduate, this piece is not for you. My hope is that you’ve already completed your child’s Free Application for Federal Student Aid (FAFSA) and your family is excited for what’s ahead.

But if you’re a parent — or might be one day — not yet celebrating a high school diploma, it’s probable you’ve at least thought about the prospect of your child attending a college or university.

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And how to pay for it. In my tutoring business, I see the fear around the latter arise in families of almost all income brackets.

The headlines can seem dire: the burden of student loan debt is ostensibly keeping an entire generation from realizing the very economic milestones that comprise the American Dream! Never mind the Great Recession, a markedly increased cost of living combined with stagnant wages (today’s average wage, after inflation, has about the same purchasing power as it did 40 years ago, according to the Pew Research Center) and runaway healthcare costs.

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Then, of course, there’s the increased real cost of a four-year postsecondary education. When making those estimates, the numbers can make most parents feel overwhelmed before they begin: College Board recommends at least a 5-percent-per-year cost increase but up to 8 percent, just to be safe.

But all is not lost. There are myriad types of financial aid to lessen the burden, from scholarships and grants to loans and work-study programs. Scholarships and grants are the most ideal of these possibilities, as they don’t require repayment. And they’re more common than you may think. According to the National Center for Education Statistics, about 49 percent of University of Colorado – Boulder (CU Boulder) students receive grant or scholarship aid — $5,366 on average.

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So, you’re likely thinking by now, how to fund the rest? After all, the average total annual cost for an in-state, on-campus student at CU Boulder is still about $31,044.

I can’t answer that for you — it’s a personal decision. That said, there’s one account type worth at least exploring. Like most things financially exciting, its name is actually a number: a 529 Plan, named after Section 529 of the Internal Revenue Code. Much like a Roth IRA, 529 Plan contributions grow tax-free (though contributions are not tax deductible) and withdrawals also enjoy exemptions. And unlike using an actual Roth IRA to fund your child’s higher education, for which withdrawals can count toward a student’s income and thus wildly change financial aid offerings year to year, a 529 Plan is considered a singular asset.    

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Hey, wake up! This is important!

There are, of course, pros and cons to a 529 Plan. On the one hand, it offers an immense flexibility compared to other options. You could, for instance, fund a Coverdell Education Saving Account — but only at $2,000 per year, and those funds must be spent by the beneficiary’s (that’s your kid) 30th birthday. By contrast, any leftover money in a 529 Plan (maybe your kid is the next multi-millionaire startup founder who drops out and thus doesn’t need your well-intentioned savings) can be transferred to another beneficiary as many times as is needed to deplete the funds. Yes, then even you could become your own beneficiary. As long as the money is used toward tuition and fees, room and board, textbooks, computer supplies and/or special needs, it doesn’t matter whether the institution in question is a private K-12 school, trade school or traditional college or university.

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If you deviate from those expenditures, however, you’ll incur a 10-percent penalty. And if you want absolute control of how your money is invested, a 529 Plan may not be your cup of tea, as most are exclusively in mutual funds and electronically traded funds. Like many investments, do your research regarding hidden management fees that can cut into your child’s tuition funds.

Often, though, you can offset some of those fees by claiming a state income tax deduction for contributions made to a 529 Plan. Furthermore, you can actually avoid certain taxes by funding a 529; as of 2019, individuals can contribute up to $15,000 without incurring a gift tax. For a couple filing jointly, that amount doubles.

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There’s one more benefit worth noting: when determining the Family Expected Contribution (FEC), FAFSA will weigh any student-owned asset at 20 percent. A parent-owned asset, however, comes in at up to 5.64 percent for the EFC determination. So if a parent has $20,000 saved into a 529 Plan in a parent’s name, that’s a $1,128 asset on a student’s FAFSA as opposed to a $4,000 asset in the student’s name.

What’s this mean to you now? Let’s say your child is 13 years old and you’re just thinking about saving for college. Let’s also say you have $2,500 saved right now. I firmly advocate for getting that latte — life deserves caffeine, in my mind — but if you could find $5 per day to stash away into a 529 Plan, then if that plan earned a 6-percent return, you’ll have $16,276 by the time your kid is a legal adult.

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That’s not nothing.

And say you’re just now celebrating a first birthday. If you start now at that same rate, you’ll have more than $70,000 squirreled away.

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But don’t take my word for it; there are actual experts presenting about this very subject at the Carbondale Branch Library Tuesday, June 11.