College Planning

Don't Risk Your Child's Financial Aid with the Wrong College Savings Plan

Your child could be missing out on valuable financial aid and subject to thousands in taxable income if you place a savings account in their name. Start saving money the right way with a 529 Plan.

Starting a College Fund: Saving for College Without Risking Financial Aid

It used to be that saving for college meant opening a savings account in your child’s name and putting away money until he or she needed it. But did you know that your child could be missing out on valuable financial aid or even be subject to thousands in taxable income if the savings account is in their name?

According to Robert Helgeson, director of financial aid for Valparaiso University in Indiana, "In the federal formula that determines how much financial aid a student receives, there are asset protections for money in a parent's name that are not there for money in a student's name. For example, if a parent has $100,000 in assets, the government is going to expect them to contribute $6,000 of it to education. If a student has $100,000 in assets, the government will expect $20,000."

Because a student’s financial aid is based on their income and assets from the year prior to applying for financial aid (in many cases, this is their junior year in high school), students with a large sum of money in their name, may be ineligible for receiving financial aid.

Fortunately, there is a way for parents to save for college that won’t put your child’s financial aid in jeopardy. Enter the 529 plan.

What is a 529 plan?

A 529 plan is a savings option that can help you strategically set aside money for college. Named after the IRS code section that created them, a 529 plan is a tax-advantaged investment plan that’s designed to encourage saving for future higher education expenses of your beneficiary (typically a child or grandchild).

A 529 plan is administered by state agencies and organizations as a way to save for qualified educational expenses such as tuition, room and board, and textbooks. Moreover, because it is the parent who owns the account, a 529 is considered part of the parent’s assets – not the student’s.

A 529 plan keeps you in control of the money. So if your child decides not to go to college, he or she won’t have access to the money unless you want them to. However, if you don’t use the money for education expenses, the IRS will charge income tax plus a 10 percent penalty on your investment earnings. While that’s not always great for your investment, it does provide a little peace of mind in knowing that you can access the money if your plans change.

In addition to the savings benefits of 529s, are the tax benefits. All withdrawals from 529 plans for qualified education expenses will remain free from federal income tax. Also, many states mirror the federal tax advantages for 529 plans by offering state tax-deferred growth and tax-free withdrawals for qualified higher education expenses.

There are many pieces in the college savings puzzle and not every plan fits every family. Your particular circumstances determine what's best for you. For more information on additional college savings plans including 529s, visit Protective’s College Learning Center.

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax‐related decisions. For information about Protective Life and its products and services, visit www.protective.com.

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529 Plan

Looking to start a college fund for your child or grandchild? A common mistake people make is to save money for college in a traditional savings account in the child's name. However, by doing so, you may be making them ineligible for financial aid. A better way to start a college fund is with a 529 plan. This article can help you learn more about the advantages of a 529 plan for both you and your child. For more information, visit the Protective learning center.

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