It is no secret that we’re big on 529 plans as investment vehicles to assist with higher education costs, especially since it is possible that the new Tax Cuts and Jobs Act may broaden usage of these plans.

Although we can't be entirely sure what Congress will include in the final draft of their tax overhaul bill, at this point we believe Coverdell Savings Accounts (an old type of education funding vehicle) are going the way of the dinosaur. This will leave 529 plans as the only tax-advantaged account available, making life a little bit simpler for parents and grandparents. Though 529 plans are a great savings vehicle, funding them indiscriminately is never wise.

Step 1 to a successful college savings plan: Determine potential financial aid

Determining what financial aid may be available prior to fully funding a 529 plan is the best way to start, basically working backwards to determine additional savings needed and then updating your plan as your child gets closer to college.

One important note: The Free Application for Federal Student Aid (FAFSA) treats parent assets less harshly than student-owned assets when calculating a family’s eligibility. This reflects a parent’s need to be planning for retirement as well as funding college. A multi-pronged approach to saving should always be considered.

The first question in searching for outside college funds should be, “Will my child qualify for financial aid?”  There is no simple answer to this, but don’t let that discourage you. The Expected Family Contribution (EFC) is a measure of your family’s financial strength and is used to determine eligibility for financial aid. There are good calculators (2 are listed below) that can give early and ongoing guidance to help you answer this question.

Tip: calculate the EFC as early as middle school

The CollegeBoard has a great calculator at https://bigfuture.collegeboard.org/pay-for-college/paying-your-share/expected-family-contribution-calculator.  You’ll want a copy of your most recent tax return to complete the information.  The results are explained in a very straightforward manner.

The FAFSA4caster gives you a free early estimate of eligibility for federal student aid, information that can help you plan ahead for college and is similar to CollegeBoard’s calculator though perhaps a bit more clunky and can be used even if you are not yet ready to submit a FAFSA form. You can find the 4caster tool on the FAFSA website: https://fafsa.ed.gov/. Look near the bottom of the right side of the homepage for a header that says "Thinking About College?"

Even if you think you may not qualify for financial aid, bear in mind that the vast majority of schools use the FAFSA for potential need-based, in-house financial aid. Even a higher EFC may qualify you for aid at a higher-priced private institution.

You can update the results as college draws closer.  Parents of younger students can use either of the above tools to receive early estimates, create scenarios based on future earnings, and then establish college funding strategies. 

If your EFC is less than the cost of the college you wish to attend, the difference is the student’s estimated “financial need”.  In the next blog, we will discuss how this need can be filled and what the “real” cost of college is.  And take heart, most students do not pay full sticker price for that dream school.

Deadlines:

For the 2017-2018 year, FAFSA applications are accepted between Oct. 1, 2016, and June 30, 2018.

For the 2018–19 year, you can apply between Oct. 1, 2017 and June 30, 2019.