How to Reduce your Expected Family Contribution When You Have a 529plan: EFC Reduction Strategies

20120613-103233.jpgEvery year, families across the US do their best to sock away money for their kids education. They try everything from the simple savings accounts, to Educational IRA’s. But amongst all the option available for parents, no savings plan has the combination of ease of investment, low startp costs, low fees, and low impact on the Expected Family Contribution than the 529 College Savings Plan.

We always assume that the private market is the best place to find solutions that work.This belief is why we have such a diverse financial market offering savings products to all income levels. However, the 529 Plan is one offered by the states while often managed by private companies. The 529 plan merges the best of both worlds, to offer a plan with the best tax treatment around. There are plenty of plans available for all investment levels and growth strategies.

With that in mind, it’s important to keep in mind how the 529 plan can help you reduce your EFC and possibly qualify you or your child for more financial aid.

Three Quick Tips to Keeping Your EFC Low

1) Move other savings meant for college to a 529: Lets say you have saved in an EdIRA, or just buying savings bonds. The best place to stick money while you can is in a 529 Plan. If you still havent filed your fafsa yet, and have more than year left before junior begins to apply for school, the 529 plan is a great place to stick money to protect what comes out from affecting the EFC. While 529 Plan is as a part of total assets, the outflows from the 529 are not treated as income. This means your yearly income is not affected by the money withdrawn, and thereby increasing your EFC. Outflows are otherwise ignored, while the amount invested in the 529 begins to decrease overall. Simply put, as the account begins to run out, the EFC of the student will begin to drop as well. So rolling over money from simple savings vehicles into a 529 is a safe and superior option where the EFC is concerned.

2) Never put the 529 in the child’s name: parents enjoy a much more favorable asset protection rate when a 529 plan is in a parents name and under parental control. Parents of students have their assets counted in the EFC formula at a maximum rate of 5.64%. At the same time, junior’s assets are counted at 20%! So by keeping the plan in the parents name, families have maximum control and the most favorable tax and EFC treatment overall. The fact that 529’s are transferable between family members and students as long as they are spent on the wide range of educational expenses permitted, makes puting the plan in the parents name the safest and best option.

3) Go for savings over pre-payment – 529’s typically come in two flavors: The first is the traditional savings plan, from which parents can choose and investment strategy based on their needs and risk tolerance. The second is the tuition pre-payment plan. This allows parents to pre-pay locked-in tuition rates of up to 100% of tuition costs at participating colleges. Its actually a great deal. The problem is, what if the college your child wants to attend isnt on that list? 529 Savings plans allow for any funds to be spent at nearly any educational institution from Harvard, to the locally accredited cosmetology school located in a strip mall. The transferability among family members of the 529 Savings plan allows for maximum flexibility and use.

Even better, withdrawals from a 529 plan are not counted against parents and students in the EFC formula as a part of annual income. So students can still potentially receive need-based aid even with a well funded 529 plan.


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