The smart way to spend your college fund
After years of saving, it's finally
time to start spending for all those college-related expenses. There's
a smart way to do it.
If you want to get an "A" in spending that
college fund, you'll need to watch the order in which you tap accounts
if you want to maximize financial aid and scoop up federal tax credits.
Let's start by looking at strategies for maximizing
financial aid. Some savings plans for college can really eat up
a student's eligibility for financial aid. The colleges use formulas
that look at how much money students have set aside through such
means as Coverdell education savings account or state-based, prepaid
tuition plans. More saved money means less student aid.
To maximize aid, you'll want to spend down the money in these accounts
-- and spend them in the right order.
Spend the student's money first
You'll also want to spend any money in a student's name before tapping
any account in a parent's name. This simple move can make a difference
in a student's eligibility for future aid.
Here's why. If a student has assets, financial aid officers expect
students to contribute 35 percent of the money toward college expenses
each year. Parents are expected to contribute only 5.6 percent of
their assets toward college expenses each year.
So the less money saved in a student's name, the better your child's
chances of scooping up some financial aid.
Aid officers consider a Coverdell education savings account, formerly
known as an education IRA, an asset of the student. The best advice
for families with money stashed in Coverdells? Spend that money
That won't be hard to do. The cash in a Coverdell account can be
applied to a wide range of educational expenses from kindergarten
through high school and on through college and graduate school.
The money can be used to pay for everything from tuition, books
and fees to academic tutoring and personal computers.
Many financial advisers encourage parents to tap Coverdell accounts
while students are still in high school.
Using up the savings in Coverdell accounts prior to college will
help boost students' eligibility for financial aid in their freshman
year. To maximize aid, you'll want to spend as much Coverdell money
as you can through December of a high school student's senior year.
Financial aid forms for college can be filed as early as January
of student's senior year.
Another option for families with a Coverdell account is to roll
the money over to a younger sibling. This will free up more financial
aid for the older brother or sister who is heading off to college
and make more money available for the current educational expenses
of the younger sibling.
Next up: prepaid tuition
If you have any money stashed in a prepaid tuition plan you'll want
to use this money right off the bat as well.
To participate in a state's prepaid tuition program, the contributor,
typically a parent or grandparent, or the beneficiary, the future
college student, must be a resident of the state.