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Free college is here - But don't stop saving
http://www.savingforcollege.com/articles/free-college-exists-but-here-s-why-you-should-still-save-1049

Posted: 2017-04-12

by Kathryn Flynn

As student loan debt continues to rise and more jobs require a college degree, government officials have been trying to make higher education more accessible to students. Oregon, Tennessee and Minnesota paved the way by offering statewide free community college, New York recently made headlines as the first state to offer free tuition at four-year public schools and earlier this year San Francisco made their City College free for residents. At the local level, there are almost 200 active free college programs in 41 states, and according to U.S. News and World Report, the trend is expected to continue.

But this news shouldn't stop parents from saving and planning for college. While these programs could be helpful for some students, they're drawing criticism due to their limitations and eligibility requirements. Here are some important things to know about free college initiatives, and why you need to keep funding your 529 plan or education savings account.

Free tuition isn't for everyone

Of course, in order to get statewide free college you have to be a state resident. But even if your state does offer a free tuition program by the time your child is ready for college, there's a good chance you won't even qualify.

For example, one of the biggest drawbacks of NY's Excelsior Scholarship is that fewer than half of the state's four-year college students will be eligible, says the New York Times. The program aims to help make college affordable for middle class families, and in order for a student to qualify, their annual household income must be less than $100,000 (increasing to $125,000 by 2019). Yet according to CNBC.com and Pew Research, a family of five in New York can earn up to $185,000 and still be considered middle class.

Other requirements put the Excelsior Scholarship out of reach for lower-income students, who arguably need it most. These students typically have to work during college, forcing them to take breaks from school or go part-time. The Scholarship not only requires students to attend full-time, but they also have to graduate in two or four years, depending on their degree.

What's more, many free tuition programs are "last dollar" scholarships, meaning the student only gets the award after all other scholarships and grants are accounted for. Many lower-income students already have a large part of their tuition costs covered since they qualify for need-based financial aid.

RELATED: 10 states with the fastest rising tuition

It isn't really "free"

Free college tuition is generally just that free tuition. Students will typically still be responsible for costs of books, room and board, transportation and spending money. According to the College Board, average room and board at a four-year in-state public school can cost over $40,000. Even if your child decides to commute, the average four-year costs of books and supplies, transportation and other expenses can exceed $18,000.

For example, looking again to New York, SUNY (the State University of New York) estimates that the $6,470 of tuition costs for a NY resident living on campus accounts for only 26% of the total costs of attendance. That means students have to come up with another $18,210 to cover fees, room & board, books & supplies, and other personal expenses.

Estimated costs for a NY resident attending SUNY and living on campus

Source: The State University of New York (SUNY)

One way families can prepare for these extra costs is by investing in a 529 college savings plan. Earnings will grow tax-free and won't be taxed when withdrawn to pay for qualified higher education expenses. Some states also offer additional tax breaks for residents. Enrolling in a 529 plan is easy, and minimum contribution requirements are as low as $25 for some plans.

It may only cover a portion of your child's education

Starting out at a community college is a great way to cut the cost of a bachelor's degree, especially if your first two years of tuition are free. Traditionally smaller class sizes also make junior college a smart choice for students who may not be ready for a large university.

But it's important to remember that even if you're child is eligible for free community college, someone still has to pay for their final years of school, which will probably be more expensive. The same idea also applies if your child qualifies for free tuition at a four-year school but continues on toward a professional degree or graduate school. Again, this is where a 529 plan would come in handy.

The future is uncertain

While there are a number of free tuition programs available to qualifying students today, there's no guarantee that things will be the same for your child in five, or even 10 years. What will happen if the state benefit you're relying on suddenly gets rolled back due to budget constraints?

The same holds true for those planning to borrow to pay for college. During his candidacy, President Donald Trump repeatedly stated his desire to take the government out of the business of lending to college students, calling into question the future of federal student loans. You'll always have more options when you have savings to draw upon versus relying on existing programs that may or may not exist in the future. Having a dedicated college savings account gives you peace of mind during uncertain times.

You'll never lose the money saved in a 529 plan

So what happens if your child gets a free ride to college and you have leftover money saved in a 529 plan? You'll have a few choices. You can take a non-qualified withdrawal (to be spent on something other than college) and pay income tax and a 10 percent penalty on the earnings portion only, you can change the beneficiary to a sibling or other qualifying family member who will need money for college or you can keep the money for your own education or a future grandchild. But most families, whether or not they're eligible for a free tuition program, should have no problem spending their savings on college expenses.

RELATED: The truth about scholarships and 529 plans

As student loan debt continues to rise and more jobs require a college degree, government officials have been trying to make higher education more accessible to students. Oregon, Tennessee and Minnesota paved the way by offering statewide free community college, New York recently made headlines as the first state to offer free tuition at four-year public schools and earlier this year San Francisco made their City College free for residents. At the local level, there are almost 200 active free college programs in 41 states, and according to U.S. News and World Report, the trend is expected to continue.

But this news shouldn't stop parents from saving and planning for college. While these programs could be helpful for some students, they're drawing criticism due to their limitations and eligibility requirements. Here are some important things to know about free college initiatives, and why you need to keep funding your 529 plan or education savings account.

Free tuition isn't for everyone

Of course, in order to get statewide free college you have to be a state resident. But even if your state does offer a free tuition program by the time your child is ready for college, there's a good chance you won't even qualify.

For example, one of the biggest drawbacks of NY's Excelsior Scholarship is that fewer than half of the state's four-year college students will be eligible, says the New York Times. The program aims to help make college affordable for middle class families, and in order for a student to qualify, their annual household income must be less than $100,000 (increasing to $125,000 by 2019). Yet according to CNBC.com and Pew Research, a family of five in New York can earn up to $185,000 and still be considered middle class.

Other requirements put the Excelsior Scholarship out of reach for lower-income students, who arguably need it most. These students typically have to work during college, forcing them to take breaks from school or go part-time. The Scholarship not only requires students to attend full-time, but they also have to graduate in two or four years, depending on their degree.

What's more, many free tuition programs are "last dollar" scholarships, meaning the student only gets the award after all other scholarships and grants are accounted for. Many lower-income students already have a large part of their tuition costs covered since they qualify for need-based financial aid.

RELATED: 10 states with the fastest rising tuition

It isn't really "free"

Free college tuition is generally just that free tuition. Students will typically still be responsible for costs of books, room and board, transportation and spending money. According to the College Board, average room and board at a four-year in-state public school can cost over $40,000. Even if your child decides to commute, the average four-year costs of books and supplies, transportation and other expenses can exceed $18,000.

For example, looking again to New York, SUNY (the State University of New York) estimates that the $6,470 of tuition costs for a NY resident living on campus accounts for only 26% of the total costs of attendance. That means students have to come up with another $18,210 to cover fees, room & board, books & supplies, and other personal expenses.

Estimated costs for a NY resident attending SUNY and living on campus

Source: The State University of New York (SUNY)

One way families can prepare for these extra costs is by investing in a 529 college savings plan. Earnings will grow tax-free and won't be taxed when withdrawn to pay for qualified higher education expenses. Some states also offer additional tax breaks for residents. Enrolling in a 529 plan is easy, and minimum contribution requirements are as low as $25 for some plans.

It may only cover a portion of your child's education

Starting out at a community college is a great way to cut the cost of a bachelor's degree, especially if your first two years of tuition are free. Traditionally smaller class sizes also make junior college a smart choice for students who may not be ready for a large university.

But it's important to remember that even if you're child is eligible for free community college, someone still has to pay for their final years of school, which will probably be more expensive. The same idea also applies if your child qualifies for free tuition at a four-year school but continues on toward a professional degree or graduate school. Again, this is where a 529 plan would come in handy.

The future is uncertain

While there are a number of free tuition programs available to qualifying students today, there's no guarantee that things will be the same for your child in five, or even 10 years. What will happen if the state benefit you're relying on suddenly gets rolled back due to budget constraints?

The same holds true for those planning to borrow to pay for college. During his candidacy, President Donald Trump repeatedly stated his desire to take the government out of the business of lending to college students, calling into question the future of federal student loans. You'll always have more options when you have savings to draw upon versus relying on existing programs that may or may not exist in the future. Having a dedicated college savings account gives you peace of mind during uncertain times.

You'll never lose the money saved in a 529 plan

So what happens if your child gets a free ride to college and you have leftover money saved in a 529 plan? You'll have a few choices. You can take a non-qualified withdrawal (to be spent on something other than college) and pay income tax and a 10 percent penalty on the earnings portion only, you can change the beneficiary to a sibling or other qualifying family member who will need money for college or you can keep the money for your own education or a future grandchild. But most families, whether or not they're eligible for a free tuition program, should have no problem spending their savings on college expenses.

RELATED: The truth about scholarships and 529 plans

 

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