Trans World Assurance Blog

Trans World Assurance: Financial Aid 101 (Part 5)

Posted on Fri, Jul 22, 2011

BORROWING VS SAVING FOR COLLEGE
A college education, as any asset, can only be paid for in three ways: future income; current income, or past income.

Future income (loan) -
Various subsidized and unsubsidized loans, sponsored by federal, state, and private sources, are available to parents and students. Borrowing is less efficient than saving, however, and should be a “last dollar” strategy. Borrowing satisfies today’s cravings at the expense of tomorrow’s standard of living.

Borrow or Save? The penalty for “instant gratification” is severe. Consider the following table:

Assumption:
Total Amount Needed: $50,000
Years to (a) borrow or (b) save: 10 years
Interest rate (borrowing or save): 4%
 

save for college


Few families realize the penalty they face by not adopting a disciplined, regular savings plan, whether it be all-encompassing or specifically for colleges, but the above table, using extremely modest assumptions, shows just how deleterious procrastination can be. In fact, at more realistic assumptions of an annual investment return of 8 percent and a cost of borrowing of 7 percent, the 10 year difference between the cost of saving or borrowing $50,000 is nearly $37,000!

Present income. Oh, the lucky family that can write, twice yearly, one check for tuition! Actually, many families do engage in a variation – choosing to utilize one of the several plans that permit yearly tuition to be paid in equal monthly installments.

Past income (savings). To the extent that colleges offer advice beyond financial aid sources, they usually emphasize the importance of building up a nest-egg suitable for college expenses. In fact, as described above, accruing assets for anticipated college expenses, no matter what the vehicle (529, Coverdell, brokerage account, etc.) is more efficient than borrowing.

 

 

Disclaimer

Trans World Assurance makes available the information and services contained herein in furtherance of Trans World Assurance's goal to inform and educate. While Trans World Assurance makes every effort to present accurate and reliable information on this site, Trans World Assurance does not endorse, approve or certify such information, nor does Trans World Assurance guarantee the accuracy, completeness, efficacy, or timeliness of such information. Trans World Assurance assumes no responsibility for consequences resulting from use of the information contained herein, or from use of the information obtained at linked sites, or in any respect for the content of such information.

Tags: Trans World Assurance, college planning, 529 plan, college funding, save for college

Trans World Assurance: Financial Aid 101 (Part 4)

Posted on Thu, Jul 21, 2011

Coverdell Accounts

college planning 101 2A Coverdell Education Savings Account (ESA)
is a savings account created as an incentive to help parents and students save for education expenses. The total contributions for the beneficiary (who is under age 18 or is a special needs beneficiary) of this account in any year cannot be more than $2,000, no matter how many accounts have been established. The beneficiary will not owe tax on the distributions if, for a year, the distributions from an account are not more than a beneficiary’s qualified education expenses at an eligible education institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.

Generally, any individual (including the beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if the individual is filing a joint return). The $2,000 maximum contribution per beneficiary is gradually reduced if the contributor's MAGI is between $95,000 and $110,000 ($190,000 and $220,000 if the contributor is filing a joint return).

Usually, MAGI for the purpose of determining your maximum contribution limit is the adjusted gross income (AGI) shown on your tax return increased by the following exclusion from your income: foreign earned income of U.S. citizens or residents living abroad, housing costs of U.S. citizens or residents living abroad, and income from sources within Puerto Rico or American Samoa. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.

Distributions are tax-free as long as they are used for qualified education expenses, such as tuition, books, fees, etc., at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Refer to Publication 970 for more details. If the distribution exceeds education expenses, a portion will be taxable to the beneficiary and will be subject to an additional 10 percent tax. Exceptions to the additional 10 percent tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

If there is a balance in the Coverdell ESA at the time the beneficiary reaches age 30, it must be distributed within 30 days. A portion representing earnings on the account will be taxable and subject to the additional 10 percent tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member.

 

Disclaimer

Trans World Assurance makes available the information and services contained herein in furtherance of Trans World Assurance's goal to inform and educate. While Trans World Assurance makes every effort to present accurate and reliable information on this site, Trans World Assurance does not endorse, approve or certify such information, nor does Trans World Assurance guarantee the accuracy, completeness, efficacy, or timeliness of such information. Trans World Assurance assumes no responsibility for consequences resulting from use of the information contained herein, or from use of the information obtained at linked sites, or in any respect for the content of such information.

Tags: Trans World Assurance, college planning, 529 plan, college funding, save for college, Coverdell Accounts

Trans World Assurance: Financial Aid 101 (Part 3)

Posted on Wed, Jul 20, 2011

529 PLANS

A qualified 529 plan is a program set up to allow families to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. Furthermore, 529 plans allow families to save for college without paying taxes on the interest that’s earned so long as the money invested in the 529 account is used for qualified education expenses (Tuition, Board, Books, etc.).

Not all states offer Guaranteed 529 plans, and those that do often limit participation to instate residents. The benefit of the guaranteed 529 plan is that you can purchase tomorrow’s tuition at today’s price. The state guarantees that the account assets will keep pace with the rising cost of Tuition.

Investment 529 plans look and act like traditional mutual funds. You buy shares of the 529 plan, which can either go up or down in value. Things to consider when evaluating 529 plans include in-state tax benefits, fund performance, and management fees. A great source of 529 plan information is www.savingforcollege.com. This is an excellent website that has information on all of the various state sponsored 529 plans.

 

Disclaimer

Trans World Assurance makes available the information and services contained herein in furtherance of Trans World Assurance's goal to inform and educate. While Trans World Assurance makes every effort to present accurate and reliable information on this site, Trans World Assurance does not endorse, approve or certify such information, nor does Trans World Assurance guarantee the accuracy, completeness, efficacy, or timeliness of such information. Trans World Assurance assumes no responsibility for consequences resulting from use of the information contained herein, or from use of the information obtained at linked sites, or in any respect for the content of such information.

Tags: Trans World Assurance, college planning, 529 plan, college funding, save for college

Trans World Assurance: Financial Aid 101 (Part 2)

Posted on Tue, Jul 19, 2011

STUDENT LOANS

Trans World collegeStudent loans are an excellent way to finance an education, so long as they are not the only form of financing. Ideally, a family should use student loans to finance no more than 25% of a student’s education. The two most common types of student loans are:

Plus Loans - stands for Parent Loan for Undergraduate Students, and is a federally backed loan to parents of children in college. With today's historically low rates, this is a great way to help finance your student's education. You can qualify for a PLUS regardless of your income, and there is no collateral requirement or prepayment penalty.

The Stafford Loan Program - is a loan from the federal government to a student. All Stafford Loans are either subsidized, with the government paying the interest on the loan while the student is still in school, or unsubsidized, in which case the student pays all the interest. However, payments on unsubsidized loans can be deferred until after graduation. A student must show financial need to receive a subsidized Stafford Loan.

Colleges can also give students Federal Perkins loans, which are low interest student loans, given by colleges on the basis of need. It is determined by college financial aid offices who qualifies for Federal Perkins Loans, and the amount of the loan. Colleges that participate are limited in the amount of Perkins loan money they can distribute, so the awards are very selective.

 

Disclaimer

Trans World Assurance makes available the information and services contained herein in furtherance of Trans World Assurance's goal to inform and educate. While Trans World Assurance makes every effort to present accurate and reliable information on this site, Trans World Assurance does not endorse, approve or certify such information, nor does Trans World Assurance guarantee the accuracy, completeness, efficacy, or timeliness of such information. Trans World Assurance assumes no responsibility for consequences resulting from use of the information contained herein, or from use of the information obtained at linked sites, or in any respect for the content of such information.


Tags: Trans World Assurance, college planning, 529 plan, college funding, save for college

Trans World Assurance: Financial Aid 101 (Part 1)

Posted on Mon, Jul 18, 2011

college planning 101Starting the Financial Aid Process:
If you are beginning the financial aid process, the first thing that you should do is fill out a FAFSA (Free Application for Federal Student Aid) form, even if you do not expect to receive “needbased” financial aid. Once the FAFSA form has been completed, schools send this to a federal processor. That processor determines what is called the Expected Family Contribution (EFC). This amount is then taken and a school will subtract from it the total cost of attending including tuition, fees, room and board, books, supplies, personal expenses and travel expenses. The result of this calculation represents the demonstrated financial need. It is this amount that determines your eligibility for need-based awards.

Once the school has arrived at that number, it will help you to explore ways of bridging the gap between what your family can afford and what it will cost to send a student to college. Options include state and federal grants, federal loans, work study employment and grants.

Expected Family Contribution (EFC) The big question, obviously, is: “Who is determined to “need” financial aid – and how is that “need” determined?”

A formula has been created, approved by the government, which most heavily counts family income (including the student), places somewhat less emphasis on assets, and pays very little attention to family debt. After examining these factors, a figure is produced, called the Expected Family Contribution, or EFC. This figure indicates how much money, on an annual basis, parents are considered to be able to afford to pay for their children’s education. All colleges and universities, public or private, must use the EFC figure when awarding government scholarships, loans, or work-study money to students.

Private colleges are free to (a) modify, or (b) ignore the EFC formula when giving out their own money or providing discounts off tuition. In other words, private colleges may offer non-need based financial aid – and most do.

 

Disclaimer

Trans World Assurance makes available the information and services contained herein in furtherance of Trans World Assurance's goal to inform and educate. While Trans World Assurance makes every effort to present accurate and reliable information on this site, Trans World Assurance does not endorse, approve or certify such information, nor does Trans World Assurance guarantee the accuracy, completeness, efficacy, or timeliness of such information. Trans World Assurance assumes no responsibility for consequences resulting from use of the information contained herein, or from use of the information obtained at linked sites, or in any respect for the content of such information.

Tags: Trans World Assurance, college planning, 529 plan, college funding, save for college

Trans World Assurance College Planning Series - 529 Plans (Part 4)

Posted on Sat, Jul 02, 2011

AN INTRODUCTION TO 529 PLANS - PART 4

Is investing in a 529 plan right for me?

Before you start saving specifically for college, you should consider your overall financial situation. Instead of saving for college, you may want to focus on other financial goals like buying a home, saving for retirement, or paying off high interest credit card bills. Remember that you may face penalties or lose benefits if you do not use the money in a 529 account for higher education expenses. If you decide that saving specifically for college is right for you, then the next step is to determine whether investing in a 529 plan is your best college saving option. Investing in a 529 plan is only one of several ways to save for college. Other tax-advantaged ways to save for college include Coverdell education savings accounts, Uniform Gifts to Minors Act (“UGMA”) accounts, Uniform Transfers to Minors Act (“UTMA”) accounts, tax-exempt municipal securities, and savings bonds. Saving for college in a taxable account is another option.

Each college saving option has advantages and disadvantages, and may have a different impact on your eligibility for financial aid, so you should evaluate each option carefully. If you need help determining which options work best for your circumstances, you should consult with your financial professional or tax advisor before you start saving.

 college planning dad son

"It’s never too early to start thinking about how to pay for college"

 

What questions should I ask before I invest in a 529 plan?

  • Is the plan available directly from the state or plan sponsor?

  • What fees are charged by the plan? How much of my investment goes to compensating my broker? Under what circumstances does the plan waive or reduce certain fees?
     
  • What are the plan’s withdrawal restrictions? What types of college expenses are covered by the plan? Which colleges and universities participate in the plan?
     
  • What types of investment options are offered by the plan? How long are contributions held before being invested?
     
  • Does the plan offer special benefits for state residents? Would I be better off investing in my state’s plan or another plan? Does my state’s plan offer tax advantages or other benefits for investment in the plan it sponsors? If my state’s plan charges higher fees than another state’s plan, do the tax advantages or other benefits offered by my state outweigh the benefit of investing in another state’s less expensive plan?
     
  • What limitations apply to the plan? When can an account holder change investment options, switch beneficiaries, or transfer ownership of the account to another account holder?
     
  • Who is the program manager? When does the program manager’s current management contract expire? How has the plan performed in the past?
     

Where can I find more information?

Offering Circulars for 529 Plans. You can find out more about a particular 529 plan by reading its offering circular. Often called a “disclosure statement,” “disclosure document,” or “program description,” the offering circular will have detailed information about investment options, tax benefits and consequences, fees and expenses, financial aid, limitations, risks, and other specific information relating to the 529 plan. Most 529 plans post their offering circulars on publicly available websites. The National Association of State Treasurers created the College Savings Plan Network which provides links to most 529 plan websites.

Additional Information About Underlying Mutual Funds. You may want to find more about a mutual fund included in a college savings plan investment option. Additional information about a mutual fund is available in its prospectus, statement of additional information, and semiannual and annual report. Offering circulars for college savings plans often indicate how you can obtain these documents from the plan manager for no charge. You can also review these documents on the SEC’s EDGAR database.

Investment Adviser Public Disclosure Website. Many college savings plans’ program managers are registered investment advisers. You can find more about investment advisers through the Investment Adviser Public Disclosure website. On the website, you can search for an investment adviser and view the Form ADV of the adviser. Form ADV contains information about an investment adviser and its business operations as well as disclosure about certain disciplinary events involving the adviser and its key personnel.

Broker-Dealer Public Disclosure Website. You can find more about a broker through the NASD’s National Association of Securities Dealers’ BrokerCheck website. On the website, you can search for any disciplinary sanctions against your broker, as well as information about his or her professional background and registration and licensing status.

Other Online Resources. You can learn more about 529 plans and other college saving options on the NASD’s Smart Saving for College (www.nasd.com go to investor relations, then college savings center) website. The website contains links to other helpful sites, including the College Savings Plan Network (www.collegesavings.org) and the Internal Revenue Service’s comprehensive 82 page Publication 970 (Tax Benefits for Higher Education www.irs.gov, click forms and publications, download forms by publication number, scroll down to publication 970). The NASD’s investor alert, www.nasd.com, (> Investor Information > Investor Alerts > 529 Plans) on 529 plans also provides valuable information.
 

Disclaimer

Trans World Assurance makes available the information and services contained herein in furtherance of Trans World Assurance's goal to inform and educate. While Trans World Assurance makes every effort to present accurate and reliable information on this site, Trans World Assurance does not endorse, approve or certify such information, nor does Trans World Assurance guarantee the accuracy, completeness, efficacy, or timeliness of such information. Trans World Assurance assumes no responsibility for consequences resulting from use of the information contained herein, or from use of the information obtained at linked sites, or in any respect for the content of such information.

Tags: college planning, 529 plan

Trans World Assurance College Planning Series - 529 Plans (Part 3)

Posted on Fri, Jul 01, 2011

AN INTRODUCTION TO 529 PLANS - PART 3

Can we purchase a 529 plan but avoid some of the extra fees?

Direct-Sold College Savings Plans. States offer college savings plans through which residents and, in many cases, non-residents can invest without paying a "load," or sales fee. This type of plan, which you can buy directly from the plan's sponsor or program manager without the assistance of a broker, is generally less expensive because it waives or does not charge sales fees that may apply to broker-sold plans. You can generally find information on a direct-sold plan by contacting the plan’s sponsor or program manager or visiting the plan’s website. Websites such as the one maintained by the College Savings Plan Network, as well as a number of commercial websites, provide links to most 529 plan websites.

Broker-Sold College Savings Plans. If you prefer to purchase a broker-sold plan, you may be able to reduce the front-end load if you invest or plan to invest above certain threshold amounts. Ask your broker how to qualify for these “breakpoint discounts.”
 

How does investing in a 529 plan impact financial aid eligibility?

While each educational institution may treat assets held in a 529 plan differently, investing in a 529 plan will generally reduce a student’s eligibility to participate in need based financial aid. 

Financial aid treatment for college investment plans depends on whether the assets held in the plan are considered to be assets of the parent or the student. According to the federal financial aid formula, which is used by many educational institutions, about 6% of parental assets, in contrast to 35% of student assets, are expected to be contributed toward the student’s college expenses for each academic year.


"marketcapandgown.com covers news about the finances of higher education"
 

What restrictions apply to an investment in a 529 plan?

Withdrawal restrictions apply to both college savings plans and pre-paid tuition plans. With limited exceptions, you can only withdraw money that you invest in a 529 plan for eligible college expenses without incurring taxes and penalties. In addition, participants in college savings plans have limited investment options and are not permitted to switch freely among available investment options. Under current tax law, an account holder is only permitted to change his or her investment option one time per year. Additional limitations will likely apply to any 529 plan you may be considering. Before you invest in a 529 plan, you should read the plan’s offering circular to make sure that you understand and are comfortable with any plan limitations.

 

Disclaimer

Trans World Assurance makes available the information and services contained herein in furtherance of Trans World Assurance's goal to inform and educate. While Trans World Assurance makes every effort to present accurate and reliable information on this site, Trans World Assurance does not endorse, approve or certify such information, nor does Trans World Assurance guarantee the accuracy, completeness, efficacy, or timeliness of such information. Trans World Assurance assumes no responsibility for consequences resulting from use of the information contained herein, or from use of the information obtained at linked sites, or in any respect for the content of such information. 

 

Tags: college planning, 529 plan

Trans World Assurance College Planning Series - 529 Plans (Part 2)

Posted on Thu, Jun 30, 2011

AN INTRODUCTION TO 529 PLANS - PART 2


How does investing in a 529 plan affect federal and state income taxes?

Investing in a 529 plan may offer college savers special tax benefits. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. 

Many 529 plans also offer additional state tax benefits. Some states allow residents to deduct contributions to 529 plans from income tax returns for the state that sponsors the plan, but most still limit state tax benefits to participation in a 529 plan sponsored by your state of residence. Some states also offer matching grants or other additional benefits, typically to low income investors. 

If you receive state tax benefits for investing in a 529 plan, make sure you review your plan’s offering circular before you complete a transaction, such as rolling money out of your home state’s plan into another state’s plan. Some transactions may have state tax consequences for residents of certain states.

college planning grandma
 

What fees and expenses will I pay if I invest in a 529 plan?

It is important to understand the fees and expenses associated with 529 plans because they lower your returns. Fees and expenses will vary based on the type of plan. Prepaid tuition plans typically charge enrollment and administrative fees. In addition to “loads” for broker-sold plans, college savings plans may charge enrollment fees, annual maintenance fees, and asset management fees. Some of these fees are collected by the state sponsor of the plan, and some are collected by the financial services firms that the state sponsor typically hires to manage its 529 program. Some college savings plans will waive or reduce some of these fees if you maintain a large account balance or participate in an automatic contribution plan, or if you are a resident of the state sponsoring the 529 plan. Your asset management fees will depend on the investment option you select. Each investment option will typically bear a portfolio-weighted average of the fees and expenses of the mutual funds and other investments in which it invests. You should carefully review the fees of the underlying investments because they are likely to be different for each investment option. 

Investors that purchase a college savings plan from a broker are typically subject to additional fees. If you invest in a broker-sold plan, you may pay a “load.” Broadly speaking, the load is paid to your broker as a commission for selling the college savings plan to you. Broker-sold plans also charge an annual distribution fee (similar to the “12b 1 fee” charged by some mutual funds) of between 0.25% and 1.00% of your investment. Your broker typically receives all or most of these annual distribution fees for selling your 529 plan to you. Many broker-sold 529 plans offer more than one class of shares, which impose different fees and expenses.

Disclaimer

Trans World Assurance makes available the information and services contained herein in furtherance of Trans World Assurance's goal to inform and educate. While Trans World Assurance makes every effort to present accurate and reliable information on this site, Trans World Assurance does not endorse, approve or certify such information, nor does Trans World Assurance guarantee the accuracy, completeness, efficacy, or timeliness of such information. Trans World Assurance assumes no responsibility for consequences resulting from use of the information contained herein, or from use of the information obtained at linked sites, or in any respect for the content of such information. 

Tags: college planning, 529 plan

Trans World Assurance College Planning Series - 529 Plans (Part 1)

Posted on Wed, Jun 29, 2011

AN INTRODUCTION TO 529 PLANS


college planning family1What is a 529 plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan.
 

What are the differences between pre-paid tuition plans and college savings plans?

Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Twelve states offer guaranteed investments in prepaid tuition plans that they sponsor.

College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.
 

“Virtually every U.S. citizen or eligible noncitizen who attends a college at least half-time will be eligible for some type of financial aid, regardless of their income.” -FAFSA
 


Pre-paid tuition plans vs. College savings plans:

The following chart outlines some of the major differences between pre-paid tuition plans and college savings plans. (Source: Smart Saving for College, NASD®)

Prepaid Tuition Plan

College Savings Plan

 

Locks in tuition prices at eligible
public and private colleges and universities.

 

No lock on college costs.

 

All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.

 

Covers all "qualified higher education expenses," including:

Tuition
Room & board
Mandatory fees
Books, computers (if required)

 

Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased.

 

Many plans have contribution limits in excess of $200,000.

 

Guaranteed or backed by state.

No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.

 
 

Most plans have age/grade limit for beneficiary.

No age limits. Open to adults and
children.

 
 

Most state plans require either owner or beneficiary of plan to be a state resident.

 

No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.

 

Most plans have limited enrollment period.

 

Enrollment open all year.

 

Disclaimer

Trans World Assurance makes available the information and services contained herein in furtherance of Trans World Assurance's goal to inform and educate. While Trans World Assurance makes every effort to present accurate and reliable information on this site, Trans World Assurance does not endorse, approve or certify such information, nor does Trans World Assurance guarantee the accuracy, completeness, efficacy, or timeliness of such information. Trans World Assurance assumes no responsibility for consequences resulting from use of the information contained herein, or from use of the information obtained at linked sites, or in any respect for the content of such information. 

 

Tags: college planning, 529 plan