Before initiating a college savings program, estimate the cost per child based on several factors such as type of college or university, full-time or part-time student and the portion of total expenses that might be expected to come from grants and scholarships. For example, a good student-athlete might quality for an academic or sports scholarship. The choice of schools, in-state, out-of-state, public or private, two- or four-year degree, will also impact cost projections. Finally, implementation of a college savings plan should never jeopardize the parents' own retirement planning.
This program was authorized by Congress under Internal Revenue Code, Section 529, and separately packaged and administered by each state. It authorizes any U. S. citizen or resident alien, regardless of income, to invest in any one of the 49 state programs (state residency not required). Suitable plans are selected based on available investment choices, risk tolerance and tax incentives offered by the particular state. These savings plans usually offer a choice of mutual funds with varying degrees of risk, including a low-risk money market or certificate of deposit option. Deposits grow tax-deferred and gains are federally tax free and may be state tax free as well, providing the funds are used for qualified college expenses.
These plans not only offer a systematic approach to saving for future college expenses, but protect the participant against escalating future tuition costs by locking in the future cost of tuition and fees at a fixed price. While each of the 13 state-sponsored prepaid tuition plans is unique, the tuition guaranty usually covers in-state public universities only. If a student decides to go out-of-state, the tuition refund would be base on the average credit-hour cost of public universities in the student's state of residency. If a student beneficiary doesn't go to college, the money can be transferred to another child or refunded to the account owner. A refund constitutes a non-qualified distribution, subjecting the earnings to ordinary income tax plus a 10 percent penalty. The same treatment applies to the 529 Savings Plans.
The more grants and scholarships students can compete for, the fewer student loans will be needed to bridge the gap between family college savings efforts and actual expenses. To be considered for any federal, state or private loans, grants or scholarships; applicants must complete the Free Application for Student Aid (FASA) available on line at the website FASA.gov. A Student Aid Report (SAR) will be prepared from the FASA form and returned to the applicant indicating what assistance programs he would qualify for based on the student's and family's reported financial resources, called the Expected Family Contribution (EFC). Each college will base its scholarship awards on the SAR, the student's grades and civic involvement.