College funding for beginning investors

Paying for college doesn’t have to be a guessing game. Photo by Ali Yahya via Unsplash.

There are some tools available to parents who want to help their kids with college finances. You’ve probably heard about the skyrocketing tuition and costs at most universities. Getting started saving as early as possible will help you with these costs.

“No one should be denied the opportunity to get an education and increase their earning potential based solely on their inability to pay for a college education.” — Bobby Scott

Overview of financial aid

Many parents with children in college are familiar with the FAFSA form, or Free Application for Federal Student Aid. The “expected family contribution” or EFC helps determine how much aid the student can get. It takes into account the family’s income, assets, and benefits, as well as how many students the family is putting through college.

A higher percentage of the assets owned by the student is used in the formula. The parent’s contributions actually have a lower weighting. Note that a 529 account owned by a parent belongs to the parent, not the child.

After the EFC is calculated, the remainder of college costs will be aid-based.

Saving money

Think about how much of college you want (and are able) to pay for. Using retirement money to fund your kids’ college is usually a bad idea, because it will put you behind in your saving. Your kids may not be able to support you in old age.

Take care of your retirement funding first.

The younger generation has decades to work and pay off loans if they need to. You can’t take out a loan for retirement.

In addition, kids tend to value their education more when they have to pay for some of it. So even if you have the money, you might not want to pay 100% of their costs. If they’ll need to work during the summer to earn money for next semester, that helps them understand how to be responsible with money. What a great lesson to learn early!

You can find online projections of how much college will cost by the time your child is ready to start. There are a number of calculators where you can figure how much money you’ll need to save. As with all online calculators and projections, these are estimates.

You may find that you’re not able to fund as much as you wanted. It’s best to let your kids know ahead of time that you can’t cover it all. That way they can save up over time. They need to know if they have to work during the summers and save for school.

College savings vehicles

There are a number of ways to provide funding. Some parents take it out of their regular brokerage accounts when the bill arrives. You can also use special accounts.

1. Custodial or UGMA/UTMA accounts

Most of these accounts now are UTMAs, which stands for Uniform Transfer to Minors Act. These accounts are held in trust for the minor in question until they reach a specific age. Usually this is the age of majority (18 or 21) in the state the account was opened.

Once the child reaches the specified age, the money in the account is theirs to do what they want. Parents can spend down the account as long as the withdrawals are for the benefit of the child. So they can be used for food, clothes, activities, etc. UTMAs are considered the child’s asset.

Benefits of custodial accounts

  • Can be used for any expense as long as it benefits the minor
  • Capital gains tax treatment at withdrawal
  • No limit on the types of investments


  • Subject to kiddie tax
  • Counted as child’s assets on FAFSA, so receive higher weighting in formula

2. 529 accounts

These accounts are named after their section of the tax code. They grow tax-free, as long as the withdrawn money is used for qualified expenses. The assets belong to the owners and not the child. Usually parents or grandparents set up these kinds of accounts.

Beneficiaries can be changed if necessary. For example, if one of your children is talented academically or in a sport, they could earn scholarships. They won’t need the amount of money you’ve set aside for them. You can transfer the additional funds to a child who will need it.

Each state has its own 529 plan, though you don’t have to use the plan in your state. Some states provide state tax deductions if their plan is used. Those in a higher tax bracket might find their state’s plan more attractive. If your state doesn’t give you a deduction, you might find a lower-cost or otherwise more attractive option in another state to use.

Many plans offer age-based funds. These are especially good for beginning investors.

They do all the work of becoming more conservative as you get closer to needing the money.

The money can be used at most colleges in the US, as well as some overseas.

Benefits of 529 accounts

  • Tax-free growth as long as the withdrawals are used for qualified expenses
  • Ability to change beneficiaries
  • Potential state tax deduction
  • Can contribute up to $75,000 at once without gift tax implications using the 5-year election
  • If the parents own the account, less expected contribution on FAFSA


  • Capital gains plus penalty on gains for non-qualified expense withdrawals
  • Investments limited to the options of the plan you choose
  • If grandparents own the account, distributions are considered income to the child


Whichever method of saving you choose, do it early and often! Many beginning investors will find the 529 account option more attractive. There are plenty of resources online to help you figure out how much to save and which plan you want.

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Jennifer Jank

Jennifer Jank

Unlocking The Secrets To Business Achievement With More Life Balance For Women ⎸Speaker ⎸Productivity Queen ⎸Ghostwriter ⎸Author ⎸Pun Lover

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