Why Wait for Financial Aid?

Steep college tuition is rising and securing financial aid is complex, possibly making tax-advantaged 529 College Savings Plans more attractive than ever.

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Go ahead, throw yourself on the mercy of State U’s aid office and crank out the scholarship essays. But you may also want to consider a tax-advantaged 529 College Savings Plan.

Ask any college student who’s stumbled through organic chemistry and they’ll probably stress the same thing: always learn the exception to the rule. That tip may apply long before your budding student takes his or her first walk to class. For college applicants and their parents, there’s no shortage of “exceptions to the rule” when navigating the financial aid process. In fact, some applicants have called it the most mindnumbing heap of paperwork they’ve ever encountered.

Qualifications vary by school and by student. For instance, what qualifies as “need” and “aid” are quite different thresholds, depending on the institution. Some schools enforce “need-blind” admissions, but increasingly, more of them care a heck of a lot about whether you can afford to go there. Everyone starts with a basic federal formula, but colleges and universities can ultimately crunch the numbers any way they choose.

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FIGURE 1: PAYING FOR COLLEGE. rants and scholarships accounted for thelargest source of funding for college costs in the most recent academic year, at 30%.Still, parents are footing a big chunk of the bill. Source: Sallie Mae. For illustrative purposes only.

No one’s suggesting you take a pass on trying for financial aid. In some cases, you’ll need to jump through the hoops simply so that your kid can get a campus job. In fact, you’ll want to jump through those hoops, because when it comes to shouldering this big bill, every bit helps (see figure 1). That said, wouldn’t it be better to control your own financial destiny?

One way to empower your family when it comes to higher-ed funding may be by diverting income and gifts to tax-advantaged 529 College Savings Plans (read last year’s Ticker Tape interview with financial advisor Ric Edelman for more on this subject). You can start when Junior first joins your family and keep contributing until your student needs the money for a traditional four-year program, for chef school, or for pretty much any institution of higher learning.* It’s never too late to start investing for college, and with 529 plans, grandparents and other family members can chip in.

For instance, in the TD Ameritrade 529 College Savings Plan:

  • Money grows tax-deferred and is excluded from your taxable estate

  • All qualified withdrawals remain federal and Nebraska state tax-free**

  • Each parent (as well as grandparents, aunts and uncles) can annually contribute a maximum of $14,000 per beneficiary, with the one-time option to combine up to $70,000 in one year (see Program Disclosure Statement for more details)

  • No minimum annual contribution required

  • Funds can be used for qualified expenses beyond tuition

  • Should a child skip college, funds can be transferred to siblings (or another member of the extended family, or yourself).

Let’s take a deeper look at the increasing complexities of financial aid’s benefits and limitations.

Comparing Apples To Ping-Pong Balls

The good news is that plowing through financial aid forms can pay off: About 71% of undergraduates received some type of financial aid in the 2011–12 academic year, according to the National Center for Education Statistics. But things get complicated when trying to compare different schools. Education experts and politicians have called for a level playing field and a universal financial aid form, but for now, the patchwork system persists.

Shop for Good

A percentage of your purchases at hundreds of qualified U.S. retailers and restaurants goes right into your child’s TD Ameritrade 529 College Savings Plan.

Start online. College websites are required by law to have net-price calculators so that people can estimate what they really are responsible for paying (i.e., not the sticker price). At the national level, the government operates the Financial Aid Shopping Sheet, which attempts to standardize the definitions and information for a side-by-side college comparison (although it’s voluntary for colleges to participate).

Once a family ditches the mock-ups for the real form, they use the Free Application for Federal Student Aid, or FAFSA. That determines whether a student qualifies for grants or subsidized student loans. Most colleges stick largely to the FAFSA formula. But many private colleges require another form, the CSS/Financial Aid Profile, and use a related formula created by the nonprofit College Board. Some use a blend. Because schools aren’t required to make their formulas public, the result is a system that’s nearly impossible for apples-to-apples comparisons.

Wrong Side Of The Ledger

Keep in mind that financial aid “awards” typically include loans and workstudy opportunities to round out things like federal Pell Grants and scholarships. That’s not exactly a gift.

What about those loans? Some financial professionals stress that student loans, at least as debt goes, are a “good” kind of debt. They help young people establish a credit history, and borrowers can generally pay them back slowly, at interest rates that typically run much lower than other types of borrowing (student loan rates were in the 4% to 5% range for 2013–14).

Some experts stress that young professionals might begin respectable retirement savings as soon as they land in the workforce, diverting money away from an aggressive pay-down of college debt.

Bottom line: debt is debt, period. The less you have, the farther you can stretch your income. If you’re diverting money to college anyway, doesn’t it make sense to do it ahead of time into a 529, where you have a potential to watch your money grow, and not after the fact, where you get buried in interest?

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The information contained in this article is not intended to be individual investment advice and is for educational and illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

The TD Ameritrade 529 College Savings Plan (the “Plan”) is one of four college savings plans sponsored by the State of Nebraska and administered by the Nebraska State Treasurer. The Plan offers a series of investment Portfolios within the Nebraska Educational Savings Plan Trust (the “Trust”), which offers other investment Portfolios not affiliated with the Plan. The Nebraska State Treasurer serves as Trustee and First National Bank of Omaha serves as Program Manager. TD Ameritrade, Inc., Distributor. The Plan is intended to operate as a qualified tuition program, pursuant to Section 529 of the U.S. Internal Revenue Code.

You should be aware that other states may sponsor their own qualified tuition plans and may offer a state tax deduction or other benefits that are limited to residents who invest in that plan. You should consult with your financial, tax or other advisor about state and local tax benefits or limitations based on your specific situation. Favorable tax treatment by your state of residence should be one of many appropriately weighted factors you should consider in making an investment decision.

Before investing in the Plan, carefully consider the investment objectives, risks, charges and expenses involved. This and other important information regarding the plan is included in the Program Disclosure Statement and Participation Agreement and each prospectus on the underlying investments, which may be obtained by emailing us at tdameritrade@nest529.com or by calling 877-408-4644. Please read each prospectus, the Program Disclosure Statement, and Participation Agreement carefully prior to investing. Investment return and principal value of an investment will fluctuate so that an investor’s units, when withdrawn, may be worth more or less than their original cost. Nebraska Educational Savings Plan Trust, Issuer. Nebraska State Treasurer, Administrator. First National Bank of Omaha, Program Manager. TD Ameritrade, Inc., Distributor.

The investments in the TD Ameritrade 529 College Savings Plan are not guaranteed or insured by the Federal Deposit Insurance Corporation (FDIC), the Securities Investor Protection Corporation (SIPC), or any other government agency, the State of Nebraska, the Nebraska Investment Council, the Nebraska State Treasurer, the State Investment Officer, First National Bank of Omaha, TD Ameritrade, or their authorized agents or any of their affiliates.

Participation in the Plan does not guarantee that contributions and the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or continue to attend an eligible educational institution.

*A donor may elect to treat a contribution to a beneficiary’s account as made ratably over a five-year period. As a result a donor may make a contribution to a beneficiary’s account of up to $70,000 (or up to twice that much if the donor and his or her spouse elect to “split” gifts) without any negative gift tax consequences, so long as the donor does not make any additional contributions to the account (or any other gifts to the account beneficiary) during that tax year or any of the succeeding four calendar years. A Federal Gift Tax Return (Form 709) is required to be filed. Please consult with your tax or legal professional. If the donor dies before the end of the five-year period, the portion of the contribution allocable to years after the donor’s death will be includible in the donor’s estate for Federal estate tax purposes.

You may not make additional contributions to a TD Ameritrade 529 College Savings Plan account when the fair market value of all accounts owned by all account owners in the Trust for the same beneficiary exceeds $360,000.

**Withdrawals used to pay for qualified higher education-related expenses are free from federal and Nebraska state income tax. These expenses include tuition, fees, books, supplies and equipment required for enrolment at a qualified institution of higher education. Room and board is considered a qualified education-related expense if the student is enrolled on at least a half time basis. The earnings portion (if any) or a Non-Qualified withdrawal will be treated as ordinary income to the recipient and may also be subject to a 10% federal tax.The material is provided for general and educational purposes only, and is not intended to provide legal, tax, or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. Every individual’s tax situation is different, and it is important to consult a qualified tax advisor regarding the application of the Plan’s benefits to your own individual situation. This material is not an offer or solicitation of any offer to buy any securities. Any offer to sell units within the Plans may only be made by the Program Disclosure Statement and Participation Agreement relating to the Plan.

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