How to Help Kids with College Funding

How to Help Kids with College Funding

May 16, 2024

Spring is the season when many families are receiving the news for the college admissions of their children into the Class of 2028. How exciting! I certainly remember how happy we felt when our son got into UCLA (2017), our daughter got into UCSB (2020), and then she graduated a year early and got into the Graduate School at NYU.

I also remember feeling grateful, and at peace, that we had saved money for their college education. The money we saved helped keep both of them away from student loan debt that I’ve seen burden so many people, sometimes decades after graduation. I still remember, as if it were yesterday, my first trip out of the house, when our son was just two weeks old, driving to a Charles Schwab office, and depositing $2,000 into an Education Savings Account. As we had just received his social security number the day before. 

Yes, I was eager to get started and take advantage of the soaring stock market and compounding growth. On top of that, none of the growth in the ESA was taxable – since we didn’t touch it until Sean went to college. A couple of years after that, I learned about 529 plans – and opened automated deposits with my employer for money to be taken out of my paychecks, directly into 529 accounts set up for both kids. 

If you have young children, here are a few tips for saving for college. And if your kid(s) are already in high school and you don’t already have a ton saved up? Talk to a qualified professional to find out what your options might be.

6 Benefits of an Education Savings Plan (such as a 529)  

  1. Grows tax free. Yes, the money going in was taxed already, and what comes out has to be used for qualified education expenses based on IRS’s definitions. Though nowadays, you can also use them for K – 12 tuitions, up to the IRS annual limit.
  2. Can be transferred within the family. So, what if a kid decides not to go to college? You can transfer the beneficiary to another family member – another child, a cousin, or even yourself!
  3. Count as parents’ assets for FAFSA purposes. I always suggest parents of college-bound kids apply for FAFSA (Free Application for Federal Student Aid). In this application, 529 assets are counted under the parents, thus, a smaller percentage is applied to calculate it into the EFC (Expected Family Contribution). That means a higher possibility of qualifying for Federal Financial Aid, compared to the assets under the kid’s name.
  4. Family members can help. Grandparents, uncles, aunties, or even friends, can set up a 529 plan for anyone. And when that happens, you don’t even have to report that asset on the child’s FAFSA application, so it has no impact to their eligibility for financial aid.
  5. Be mindful when you use the money. Since a 529 setup by others (not the parents) are not counted in FAFSA, you may consider the sequence when you use which 529 asset to enhance the kid’s chance for possible financial aid.
  6. Additional possibilities and benefits. Secure Act 2.0 opens a door for 529 to ROTH conversion. So for those parents who wonder what if we saved too much into 529? Or the kid decided not to go to college, or got scholarships? Now you can convert that money leftover in a 529 plan to a ROTH IRA, as long as you follow the rules set by the SECURE Act 2.0!

Overwhelmed? This is a topic that I am passionate about, so feel free to reach out if you want to learn more. I can be reached at: li.tian@lpl.com

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. Li Tian, Ph.D., CFP® and LPL Financial do not provide tax or legal advice or services. Please consult your tax or legal advisor regarding your specific situation.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, and CERTIFIED FINANCIAL PLANNER™ in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.

LPL Financial and the CFP® Board are not affiliated entities.

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