COLLEGE SAVINGS 101

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Don't Let These Myths Muddle College Savings
http://www.savingforcollege.com/articles/dont-let-these-myths-muddle-college-savings-849

Posted: 2015-09-29

by Keith Bernhardt, vice president of college planning at Fidelity

Don't Let These Myths Muddle College Savings

I am inspired every day by families' dedication to funding education. From parents' diligent savings habits to kids' tireless work to score scholarships -- families across the country are looking for ways to make college dreams a reality. I can relate: I was able to afford college, thanks to a Navy ROTC scholarship, and my parents who were able to save enough to help with rent and food.

Dedication to saving and thorough planning are two positive habits reflected in Fidelity's recently released 9th annual College Savings Indicator Study. Almost seven in ten families are now saving for college – an all-time high from when the study debuted in 2007. Furthermore, parents are saving more strategically, by developing financial plans to reach their savings goals (62 percent), and using tax-advantaged 529 savings accounts (39 percent).

Though parents are making savings strides, there is still room for improvement: American families are currently on track to save just 27 percent of their college funding goals by the time their child is ready to head to campus. What accounts for this disconnect? One factor could be the misconceptions that many parents believe surrounding the college savings process, which leaves many parents confused about the different options available to help them save. Let's debunk some of these myths:

RELATED: 76% of families have college funds by first grade

MYTH #1: Saving for college impacts financial aid eligibility: 53% of parents believe that saving too much will impact their child's eligibility for financial aid.

The federal financial aid system is designed in a way so that savings only has a modest degree of impact on financial aid. The formula used on the FAFSA– Free Application for Federal Student Aid – is structured so that no more than 5.64 percent of parents' non-retirement savings is factored towards a family's expected contribution to the cost of college in a given year. This low 5.64 percent cap includes savings in college dedicated vehicles such as 529 plans. For example, this means if you are able to save $10,000 for college, less than $600 of this savings will be part of the expected family contribution for college expenses for that school year.

RELATED: 15 facts about financial aid eligibility

MYTH #2: 529s are for the rich: 55% of parents say 529 plans are more for the affluent.

Investments in 529 college savings accounts grow federal tax-free and there is no federal tax on investment earnings provided that spending from the 529 is used for qualified higher education expenses. Thus, 529 plans may provide a significant tax savings benefit for anyone that would expect to pay taxes on investment earnings during their college savings and expense time horizon. Additionally, many states also offer tax deductions or credits for 529 contributions.

RELATED: 6 must-know 529 plan rules

MYTH#3: My child will be "making bank" after graduation: On average, parents with children in college expect their child's entry-level salary to be $79,000.

According to a 2013 NACE Salary Survey, the average starting salary for a post-grad is $45,000. It behooves both students and parents to get as realistic as possible about starting salary post graduation. There are many unknowns when it comes to predicting salary, such as unexpected change of major, or an uncertain economy. By being realistic, doing research, and consulting with a guidance counselor, families can more accurately assess how much debt both parents and children are comfortable taking on.

RELATED: Want to land a great job? Here's where you should go to school.

MYTH #4: I'll never be able to save enough: 36% of parents say they don't bother saving for college because they'll never be able to save enough.

For parents overwhelmed by the task of saving for college, here are three tips to get your savings on track:

  • Don't get stuck on the sticker price. Few families pay the full cost of college advertised. Many colleges, including esteemed universities, help to make sure cost is not a barrier to enrollment. Further, every higher education institution that offers federal student aid programs is required to post a net price calculator on their website that will estimate your out-of-pocket expenses, which are often lower than the official price tag. While there are numerous ways to help cover these potentially more reasonable out-of pocket-costs such as grants, scholarships, current income, work-study, and loans, savings is important since it helps to reduce loan levels and can help to provide more flexibility when evaluating college options.

  • Save early, make it automatic, and save in a dedicated account. It is never too early to start saving for college because a longer timeline will give your funds room to grow. A regular auto-transfer into an account dedicated to college savings, eliminates the anxiety surrounding when you will be able to make your next contribution; and since the money is separate from everyday saving and spending, you will feel less inclined to tap into it for other purposes. Our new calculator, "College Savings Quick Check," can help estimate how much to save monthly, the benefits of starting to save earlier, and the impact of a moderate increase in saving each month over the long-term.

  • Talk to your kids – before high school. Gather as a family to discuss your resources, expectations, and what's possible based on where you stand financially. You might be surprised by their response.

RELATED: The magic number for college savings

Just a year ago, I sat down with my two children, ages 11 and 13, to discuss our family's college savings strategy. While initially wide-eyed about the cost and our family's expectations, they soon got the savings mantra down. "Maybe we should cook instead of going out to dinner," my youngest posited. "We should start buying cheaper stuff," the eldest suggested. They're learning the value of saving. And while they're not quite ready to toss their graduation caps, I've planted the seed and I know that the time is now to find the best ways to save.

RELATED: 4 ways to get your kids involved with saving for college

Keith Bernhardt is vice president of retirement and college products at Fidelity Investments.

The UNIQUE College Investing Plan, U.Fund College Investing Plan, Delaware College Investment Plan, and Fidelity Arizona College Savings Plan, are offered by the State of New Hampshire, MEFA, the State of Delaware, and the Arizona Commission for Postsecondary Education, respectively, and managed by Fidelity Investments. If you or the designated beneficiary is not a New Hampshire, Massachusetts, Delaware, or Arizona resident, you may want to consider, before investing, whether your state or the designated beneficiary's home state offers its residents a plan with alternate state tax advantages or other benefits.

Units of the Portfolios are municipal securities and may be subject to market volatility and fluctuation.

Please carefully consider the Plan's investment objectives, risks, charges and expenses before investing. For this and other information on any 529 College Savings Plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view online. Read it carefully before you invest or send money.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Fidelity Brokerage Services LLC, Member NYSE, SIPC,
900 Salem Street, Smithfield, RI 02917
737433.1.0
©2015 FMR LLC. All rights reserved.


Don't Let These Myths Muddle College Savings

I am inspired every day by families' dedication to funding education. From parents' diligent savings habits to kids' tireless work to score scholarships -- families across the country are looking for ways to make college dreams a reality. I can relate: I was able to afford college, thanks to a Navy ROTC scholarship, and my parents who were able to save enough to help with rent and food.

Dedication to saving and thorough planning are two positive habits reflected in Fidelity's recently released 9th annual College Savings Indicator Study. Almost seven in ten families are now saving for college – an all-time high from when the study debuted in 2007. Furthermore, parents are saving more strategically, by developing financial plans to reach their savings goals (62 percent), and using tax-advantaged 529 savings accounts (39 percent).

Though parents are making savings strides, there is still room for improvement: American families are currently on track to save just 27 percent of their college funding goals by the time their child is ready to head to campus. What accounts for this disconnect? One factor could be the misconceptions that many parents believe surrounding the college savings process, which leaves many parents confused about the different options available to help them save. Let's debunk some of these myths:

RELATED: 76% of families have college funds by first grade

MYTH #1: Saving for college impacts financial aid eligibility: 53% of parents believe that saving too much will impact their child's eligibility for financial aid.

The federal financial aid system is designed in a way so that savings only has a modest degree of impact on financial aid. The formula used on the FAFSA– Free Application for Federal Student Aid – is structured so that no more than 5.64 percent of parents' non-retirement savings is factored towards a family's expected contribution to the cost of college in a given year. This low 5.64 percent cap includes savings in college dedicated vehicles such as 529 plans. For example, this means if you are able to save $10,000 for college, less than $600 of this savings will be part of the expected family contribution for college expenses for that school year.

RELATED: 15 facts about financial aid eligibility

MYTH #2: 529s are for the rich: 55% of parents say 529 plans are more for the affluent.

Investments in 529 college savings accounts grow federal tax-free and there is no federal tax on investment earnings provided that spending from the 529 is used for qualified higher education expenses. Thus, 529 plans may provide a significant tax savings benefit for anyone that would expect to pay taxes on investment earnings during their college savings and expense time horizon. Additionally, many states also offer tax deductions or credits for 529 contributions.

RELATED: 6 must-know 529 plan rules

MYTH#3: My child will be "making bank" after graduation: On average, parents with children in college expect their child's entry-level salary to be $79,000.

According to a 2013 NACE Salary Survey, the average starting salary for a post-grad is $45,000. It behooves both students and parents to get as realistic as possible about starting salary post graduation. There are many unknowns when it comes to predicting salary, such as unexpected change of major, or an uncertain economy. By being realistic, doing research, and consulting with a guidance counselor, families can more accurately assess how much debt both parents and children are comfortable taking on.

RELATED: Want to land a great job? Here's where you should go to school.

MYTH #4: I'll never be able to save enough: 36% of parents say they don't bother saving for college because they'll never be able to save enough.

For parents overwhelmed by the task of saving for college, here are three tips to get your savings on track:

  • Don't get stuck on the sticker price. Few families pay the full cost of college advertised. Many colleges, including esteemed universities, help to make sure cost is not a barrier to enrollment. Further, every higher education institution that offers federal student aid programs is required to post a net price calculator on their website that will estimate your out-of-pocket expenses, which are often lower than the official price tag. While there are numerous ways to help cover these potentially more reasonable out-of pocket-costs such as grants, scholarships, current income, work-study, and loans, savings is important since it helps to reduce loan levels and can help to provide more flexibility when evaluating college options.

  • Save early, make it automatic, and save in a dedicated account. It is never too early to start saving for college because a longer timeline will give your funds room to grow. A regular auto-transfer into an account dedicated to college savings, eliminates the anxiety surrounding when you will be able to make your next contribution; and since the money is separate from everyday saving and spending, you will feel less inclined to tap into it for other purposes. Our new calculator, "College Savings Quick Check," can help estimate how much to save monthly, the benefits of starting to save earlier, and the impact of a moderate increase in saving each month over the long-term.

  • Talk to your kids – before high school. Gather as a family to discuss your resources, expectations, and what's possible based on where you stand financially. You might be surprised by their response.

RELATED: The magic number for college savings

Just a year ago, I sat down with my two children, ages 11 and 13, to discuss our family's college savings strategy. While initially wide-eyed about the cost and our family's expectations, they soon got the savings mantra down. "Maybe we should cook instead of going out to dinner," my youngest posited. "We should start buying cheaper stuff," the eldest suggested. They're learning the value of saving. And while they're not quite ready to toss their graduation caps, I've planted the seed and I know that the time is now to find the best ways to save.

RELATED: 4 ways to get your kids involved with saving for college

Keith Bernhardt is vice president of retirement and college products at Fidelity Investments.

The UNIQUE College Investing Plan, U.Fund College Investing Plan, Delaware College Investment Plan, and Fidelity Arizona College Savings Plan, are offered by the State of New Hampshire, MEFA, the State of Delaware, and the Arizona Commission for Postsecondary Education, respectively, and managed by Fidelity Investments. If you or the designated beneficiary is not a New Hampshire, Massachusetts, Delaware, or Arizona resident, you may want to consider, before investing, whether your state or the designated beneficiary's home state offers its residents a plan with alternate state tax advantages or other benefits.

Units of the Portfolios are municipal securities and may be subject to market volatility and fluctuation.

Please carefully consider the Plan's investment objectives, risks, charges and expenses before investing. For this and other information on any 529 College Savings Plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view online. Read it carefully before you invest or send money.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Fidelity Brokerage Services LLC, Member NYSE, SIPC,
900 Salem Street, Smithfield, RI 02917
737433.1.0
©2015 FMR LLC. All rights reserved.


 

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