Borrowing with smarts (part 5)

Education

Most people wonder why they should save for college of higher education when they will get more financial aid if they do not have savings. The truth of the matter is that most all financial aid is not grants but comes in the form of loans. It is important for you to understand this now. It may take the form of loans to the students or to their parents, loans where the interest rate is low or where it is at market rates. Whatever the actual details are, these are all loans folks. They all have to be repaid with some amount of interest attached to them.

Worth mentioning: The typical financial aid packet that is offered to students has very little or even no grant money attached to them. This means that if you have not saved any money for higher education, you will simply end up paying back the school loans long after your children have finished college. Or if they took the debt on, they will be working in their new professions for many years with a lot of debt from school loans.

Also, current financial aid formulas only require that you contribute6% of your financial assets towards your children’s college expenses. If you think about it, this is really only a very little amount more than the money market interest rate your assets could earn each year. SO you really will not be spending much of your principle for collage.

Section 529 plans

The best place to save for college is within a Section 529 College Savings Plan. These savings plans are sponsored by individual states but governed under a federal law that allows you certain federal tax breaks. These days, withdrawals from Section 529 plans that are used to pay tuition, room and board, and other like expenses at accredited post secondary schools are tax free. These facts alone really make these types of savings plans a great idea - and better than most any other form of saving for college.

The money in the plan is under the parent’s name and in the control of the parent as well. The account can be set up with a specific child as the beneficiary. If that child does not go to college, the money can be allocated to another child in the same family, a grandchild, a parent going back to school, or a first cousin of the original beneficiary. Also, whether the money is contributed by parents, grandparents, aunts, uncles, or friends, it still comes out on a tax free basis.

There are two basic types of 529 plans. The first accepts contributions from anywhere and can be used for any accredited post secondary school in the country. The second type provides its best benefits to the saver if the student goes to a post secondary school within the state.

Be sure to read the second half of the education article here.

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