Financial Literacy

The biggest benefits of these state- or school-operated ‘qualified tuition programs’ are:

• The earnings are tax free if used for qualified higher education expenses.
• The funds are controlled by the person who opened the account until they are withdrawn.
• Significant contributions can be made by you, family members or friends.
• And these plans can be set up for your children, grandchildren … even for yourself.

So what’s the difference between a savings and prepaid tuition plan?

Savings plan:

Think of the savings plan as an investment, with your earnings based on the performance of the stock market. The 529 savings options are a lot like mutual funds, with the offerings usually being a mix of stocks and bonds, and they are likely to be offered with choices at various levels of risk – from aggressive to conservative.

These plans – which generally earn more money than traditional savings accounts like money markets or CD’s - are offered by most states. The money and its earnings can be used for both undergraduate and graduate costs - including tuition, room and board, even computers and peripheral equipment – at any accredited college or university.

A benefit of this type of plan is that you can invest one state’s plan and send your child to a school in a different state. And, if you like, you can move your money once a year into a plan that might be more attractive in another state.

You can invest in any state’s 529 savings plan and your earnings are not subject to federal income taxes when used for qualified education costs. While the actual contributions are not deductible on your federal taxes, some states do allow this type of deduction.

Prepaid Plan:

These plans allow you to pay money now to lock in future college costs, but they are less widely available than the 529 savings plans.

Depending on the type of prepaid plan, the money you pay usually allows you to cover in-state tuition costs, although some plans might cover other expenses as well. And most prepaid plans have age or grade limits for the beneficiary.

Since these plans are usually targeted at the schools offering them, make sure you check to see what your money-transfer options would be if your child or beneficiary chooses a different school to attend.

An advantage of this type of plan is that your payments lock in future college costs and the plan must make good on its promise.

Things to keep in mind:

While 529 college plans are attractive because their earnings are tax-free when the money is used for qualified education expenses, another big benefit is that large amounts of money can be deposited for the beneficiary – in excess of $300,000 for some plans.

Contributions under $14,000 annually fall under the federal gift tax exclusion and a lump-sum deposit of up to $70,000 can be spread out over five years and still qualify. To make saving easier, automatic transfers can also be set up from your checking or savings accounts.

The plans are also professionally managed, but you’ll want to check on any fees associated with the plan you choose.

There also are other considerations to be aware of.

If the money in the plan isn’t used for qualified education expenses, you face a 10% withdrawal penalty on the earnings (not the principal), and the withdrawn earnings will also be taxed at your regular income tax rate.

However, if your child decides not to attend school, the person who controls the account could name another beneficiary for the money and it could be used for that new person’s qualified educational costs.

The money in a 529 account will have some effect on financial aid applications. Be sure to check with an advisor on how this is affected by federal or school rules.

And as part of any financial planning, make sure to do your research on the options you have, and check with a trusted financial advisor on the various plans’ options and risk levels. 

With a federal student loan, you have several options for repayment. Plans range from repayment of the loan over 10 years to payments that are based on your income.

With federal loans, you’ll also be able to switch payment plans, but you will need to work with your loan servicer on where to make payments and how much you’ll be paying.

Some amounts owed for federal student loans may also be forgiven based on your profession, such as teaching or public service. For more information about repaying federal student loans, loan forgiveness, and the types of loans available, visit studentaid.gov. 

If you take out a private loan from a financial institution, it’s important to understand the loan terms and repayment requirements. Be sure to know when your payments begin and to make all payments on time.

Evaluating all of your student loan options is the first step to ensuring you select a payment option that fits your financial situation.

Federal options include subsidized and unsubsidized loans. These loans help cover the costs of tuition, books, supplies, and room and board. There are borrowing limits based on the loan type and whether you are an undergraduate or graduate student.

The advantages of federal loans include flexibility in repayment plans and possibly even some loan forgiveness based upon your job. You can apply for federal student loans for free at fafsa.gov.

For detailed information about federal student loans and your options, visit studentaid.gov.

Another option is to take out a private loan through your financial institution. These loans can either help cover education costs or expenses that exceed federal student loan amounts.

No matter which type of student loan you choose, you are borrowing money, with interest, that needs to be repaid.

It’s important that you know what your repayment responsibilities are and when your payments begin. Remember to make your payments on time and in full.

Evaluating all of your savings and loan options based on your individual needs is the first step to safeguarding your financial future.

In the best of all worlds, you’ll pay as much as you can each month, with the goal of paying off the loan faster and reducing the amount on interest you would have paid. You’ll also want to make payments on time because late or missed payments will show up on your credit report and can lower your credit rating, which can make it harder to get things such as a credit card, a mortgage or other loans.

With student loans, it’s not uncommon to be dealing with a variety of lending institutions. With that in mind, it might make sense to consolidate or refinance your loans so you’ll only be making a single payment each month. If you have a federal student loan, ask your servicer about consolidation options, and if you have private loans check with your lender to see if refinancing could get you a lower interest rate or a longer repayment term.

Your monthly payment will be based on the amount you owe, your interest rate and the length of the repayment plan. While it’s important to always make at least the minimum payment, experts recommend that you try to pay more whenever you can. This will help retire your loans faster, reducing the amount of interest charges you’ll pay, possibly saving you thousands of dollars.

Keep in mind that once you take out a student loan interest will start accruing. With federal student loans, the government will pay that interest while you are in school. With a private loan, you are responsible for all interest costs from the time the loan is issued so you might want to make interest-only payments while still attending classes.

To help ensure you won’t miss a payment, you should consider having the money automatically withdrawn from your bank account and you should factor these payments into your monthly budget along with your other spending obligations so you can make sure you have enough money to cover all your needs.

To learn more about federal student loans and your repayment options, visit ed.gov and studentaid.gov. To find name and contact information about your loan servicer and other details about your loan, check out the National Student Loan Data System: nsldsfap.ed.gov.

The big lesson to be learned with student loans is to find out who you need to repay, how much you owe, when the payments start, how long it’s going to take to pay them off, and then to always make your payments on time.

First, list all your debts - such as credit cards, bills, and loans - from the lowest to highest amounts.

Next, make the minimum monthly payment on each bill, using any extra money you have towards clearing the total balance of the lowest bill.

As you roll your payments from the smallest balance to the next one on your list, the amount you can pay “snowballs,” giving you more funds to pay down the bigger debts.

Now, onto the Avalanche Method!

This method is simple, just list and pay your debts from those with the highest interest rates to the lowest. This way, you can slide your way down the debt mountain, saving money in the long run because you’re paying off high-interest debt first, while still making minimum monthly payments on the others.

So which method is better?

That’s up to you. The snowball strategy can be encouraging because you’ll see debts getting paid quickly, while the avalanche attack can save money by paying less in interest costs over time.

Ultimately, either method can help you stay focused on paying off all your debt. Now won’t that be cool?

If you live away from home during college, protecting personal information starts in your dorm room or apartment, where it’s likely you’ll be around a lot of people. Don’t leave important documents lying in the open – that means things like your Social Security card, financial statements or medical or insurance documents. Lock them up if at all possible, or at least hide them. Don’t leave your wallet were someone could walk away with it.

Experts also recommend that you have a shredder and that you use it to destroy things such as credit card offers you get in the mail or any paper documents you no longer need.

It’s also important to protect your online excursions. Make sure you use strong passwords for all online accounts, and don’t use the same password for every account, especially financial accounts. Also, be sure to use a passcode to access mobile devices as well as your computer, and always log out of accounts when you’re done.

Don’t click on links in emails or download any files unless you are certain of the sender. Identity thieves try to lead you to forms that ask for personal information or to distribute malware that could collect passwords or other important data. You also should avoid the temptation to overshare on social media. The more information crooks can learn about you, the easier it can be for them to misuse it in your name.

Be sure to take advantage of online and mobile banking tools at your disposal so you can check your accounts for any problems, day or night. Experts recommend that you monitor your checking and credit card accounts regularly and that you report questionable transactions immediately. They also say to take advantage of account text or email alerts that notify you of things like balance changes, ATM withdrawals, online spending, or attempted password changes so you can take quick action.

Be sure to call your financial institution or credit card company immediately if you misplace your debit or credit card. Many card issuers now have ways that you can sign into your account and turn your card ‘off’ or ‘on’. ‘Off’ should stop transactions from being completed. Ask your card issuer for more information.

Learning how to protect yourself from identity theft while you’re in college is a big step toward guarding your financial security. It’s a lesson that can last a lifetime.