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College Funding

College Funding

College Funding

College costs have been increasing faster than the general inflation rate, for years. Yes, this can be expensive but there are ways to manage the process, educate your students and not end up in the poor house.

It is a process, you need to file forms: the Free Application for Federal Student Aid (the application is the only thing about college that is free!) which is known as the FAFSA.  You can preview a copy of the FAFSA at http://www.fafsa.ed.gov/ .  Besides the forms, you will need to comply with deadlines for filing the FAFSA and responding to Financial Aid Office requests for additional information.  To better understand the process, attend College Information Nights as your student progresses through high school.  Another very good website for understanding the process is http://www.finaid.org/ .

There are savings programs to help you accumulate funds for these upcoming expenses.  Two of the most popular savings programs are the Educational Savings Account (ESA) and the 529 Plan.

The ESA is a program where the maximum contribution per beneficiary per year is $2,000.  The contributor must have an Adjusted Gross Income below certain limits, based on their tax filing status.  This income limit test is fairly friendly and most people do not have a problem meeting it.  Contributions to ESAs are made with after-tax money (there is no immediate tax benefit); distributions from the account are tax free, provided the beneficiary has qualified education expenses in the year of the distribution.  Investments within the ESAs are picked and managed by the contributor. 

The 529 plans are programs authorized by the individual states and administered by third party financial institutions.  The states dictate how much can be contributed every year, in most cases, this amount will be much more than $2,000.  There is no income test for the contributor. Like the ESAs, the contributions to 529 plans are made with after-tax money (there is no immediate tax benefit); distributions from the account are tax free, provided the beneficiary has qualified education expenses in the year of the distribution.  Investments within the 529s are typically mutual funds.  Although the 529 plans are authorized at the state level, you are free to invest in any state’s plan and your student can attend college in a completely different state.  In other words, you are not restricted to investing in your resident state, you are not restricted to attending college in the state that authorized the plan you invested in. Some 529 plans are also suitable for professionals furthering their careers and attaining additional degrees in their professions.  A very good website for investigating 529 plans is http://www.savingforcollege.com/ .

Remember almost all American families can run the gauntlet of college funding without going broke.  The important thing is to plan ahead.  Failing to plan is planning to fail, take action, no one else is as concerned about your family’s education as you are.