What’s the Best Way to Fund College in Louisiana?
Parents need to start saving for education expenses as early as possible. Over the next 18 years, the costs of attending a public university in Louisiana for an undergraduate degree may cost as much as $174,000! People often ask me, “What’s the best way to fund college expenses for a loved one?” There are a couple of options, but a 529 plan trumps the Coverdell and the use of a Roth IRA.
What is a 529 plan?
A 529 plan is a qualified plan created to help fund education expenses. The plans have tax benefits as incentives. Think of 529s as Roth IRAs for education without the annual funding limits. Earnings inside of a 529 plan grow tax-free and will be tax-exempt if used for Qualified Higher Education Expenses (QHEE). These expenses include tuition, fees, room, board, books, and more.
A 529 plan offers a lot of flexibility. The account owner can transfer the account to different beneficiaries to accommodate student needs. Even the account holder is an eligible beneficiary.
A unique advantage to the 529 plan is estate-related. Assets inside a 529 plan don’t remain in your taxable estate, but the account owner maintains control of the assets. Exclusion from your estate is a valuable planning tool. Front-loading savings allows an individual to stack 5 yrs of gifts ($14k/yr for 5 yrs= $70k all at once). Couples filing jointly can stack $140k at once without generating a taxable gift. When you consider the flexibility of changing beneficiaries, there are few comparable options.
Why is LA START a better 529 plan?
Most states offer 529 plans, but, believe it or not, Louisiana has one of the finest programs in the USA! The Louisiana Student Tuition Assistance and Revenue Trust Program, or “START Saving Program,” is a great way to save for college and other post-secondary schools. Louisiana’s START program is direct-sold. There are no middlemen in between your funds and the plan. You deal directly with the plan administrator, the Louisiana Office of Student Financial Assistance.
The START program has no administrative fees or charges. They use several low-cost Vanguard funds, leaving more money for your beneficiaries to use for college. Direct selling reduces expenses dramatically, but it also explains why so few people are familiar with the plan. Brokers don’t get paid to sell them. So they don’t sell them. If you’re a Louisiana resident and your current advisor hasn’t mentioned the LA Start plan, it may be a good time to ask why.
Very few states offer a matching program. However, Louisiana offers a ‘match’ with a sliding scale of 2% to 14% depending on account type and adjusted gross income. These “earnings enhancements” are deposited annually, much like a company match. Even the highest earners will receive a 2% match on their annual funding contributions. Consider earnings enhancements as ‘free money’ for post-secondary education savings.
Another benefit of the Louisiana plan is a state tax break for account owners based on each year’s contributions. Couples can reduce their taxable base by $4,800/yr and individuals $2,400/yr. The Louisiana Principal Protection Fund is an investment option that the State of Louisiana guarantees. Last year this fixed income fund yielded over 2.5%!
How will a 529 affect financial aid?
EFC funding/ownership options are an important part of college planning. The assets inside a 529 plan remain in possession of the account holder, impacting financial aid. FAFSA dictates the calculations for Expected Family Contributions (EFC) and account ownership matters. The EFC determines how much a family should contribute to your child’s tuition.
Parental assets are currently assessed at a maximum of 5.64% while the student’s assets are assessed at a maximum of 20%. Grandparents 529 plans are not included in EFC prior to distribution. However, they will affect the financial aid the year following the distribution at the higher rate of 20%. If the availability of financial assistance is a concern, grandparents should consider saving their 529 plan distributions for senior year. Here are some additional details on Effective Family Contribution EFC.
What if my beneficiary gets a scholarship?
What if your beneficiary is fortunate enough to get a scholarship? How can you use the funds inside of the 529 plan? Most scholarships will only cover a portion of a student’s qualified expenses so a 529 will still come in handy. If it looks like you will still have money left in the account after paying these expenses, there are a couple of alternatives. The IRS allows account owners to refund assets equal to the annual scholarship value without incurring the 10% penalty. Contributions are never taxed, and earnings are taxed as ordinary income. Another way to use excess 529 funds is to simply change beneficiaries.
How do I get started?
To open a 529 plan with LA START, either the beneficiary or the account owner needs to be a Louisiana resident when the account is opened. Once the account is open, residency is no longer necessary. There are six categories of account ownership. Families can open an account with as little as $10. Once the account is open, there are no time limits for funding or distributions. LA START funds aren’t limited to use at Louisiana colleges. LA Start funds can be used in any state as long as they cover qualified education expenses.
College planning is complicated, but college saving doesn’t have to be. Louisiana has an easy choice- LA Start.