Are College Savings an Asset?
A recent report, “How America Pays for College,” Sallie Mae’s national study of college students and parents, found some very interesting data. Many families are making sure that they set money aside to help their children go to college. Parents’ income and savings paid the largest portion of college costs (43 percent), while 26 percent was covered by scholarships and grants.
As families plan for their children’s higher education, one question that often arises is whether college savings should be considered an asset. The treatment of college savings as an asset can have implications for financial planning, including eligibility for financial aid and overall wealth management.
Consulting with a financial counselor specializing in education planning can provide valuable guidance and customized strategies to optimize the benefits of college savings as an asset.
Defining College Savings as an Asset
College savings refer to funds set aside specifically for funding higher education expenses. These savings can be held in various types of accounts, such as 529 college savings plans, Coverdell Education Savings Accounts (ESAs), or custodial accounts (UTMA/UGMA).
While these accounts serve the purpose of funding education, the question arises as to whether they should be considered as assets in the broader financial context.
Financial Aid Considerations
One of the primary concerns regarding the classification of college savings as an asset is its potential impact on financial aid eligibility. When determining financial aid awards, colleges and universities assess the family’s financial strength, typically through the Expected Family Contribution (EFC) calculation. The EFC considers various factors, including income, assets, family size, and the number of family members attending college at the same time.
For most financial aid programs, college savings accounts, such as 529 plans and Coverdell ESAs, are typically considered parental assets. As such, they are factored into the EFC calculation, albeit with varying degrees of impact. Custodial accounts (UTMA/UGMA) are generally considered student assets and can have a more significant impact on financial aid eligibility.
Wealth Management and Financial Planning
College savings also play a role in overall wealth management and financial planning. They represent a valuable asset that can contribute to a family’s long-term financial goals.
Benefits of College Savings as an Asset
- Tax-Advantaged Growth. College savings accounts, such as 529 plans and Coverdell ESAs, offer tax advantages, such as tax-free growth or tax-free withdrawals for qualified education expenses. These benefits can enhance the overall return on investment and provide a significant boost to funding higher education costs.
- Flexibility in Allocation. College savings accounts offer flexibility in investment options, allowing families to select strategies aligned with their risk tolerance and time horizon. This flexibility enables families to tailor their investments to their specific financial goals while taking advantage of potential market growth.
- Long-Term Wealth Accumulation. By considering college savings as an asset, families acknowledge the potential long-term benefits of these investments. College savings accounts can grow over time, providing additional financial security and contributing to overall wealth accumulation.
Strategies for Maximizing College Savings
- Start Early and Contribute Regularly. “The power of compounding works best when savings are initiated early,” says Jack Lamont, Senior Vice President of Investment at David Lerner Associates, “Starting a college savings plan as soon as possible and contributing regularly can help build a substantial asset base over time. Integrate college savings into the overall financial plan, taking into account other goals, such as retirement savings or debt reduction. Striking a balance between these goals is crucial for long-term financial stability.”
- Evaluate Investment Options. Review the investment options available within college savings accounts and select a strategy that aligns with the desired risk profile and investment goals. Regularly reassess and rebalance the portfolio to ensure it remains in line with objectives.
In a survey, 89% of families took active steps to make college more affordable.
In conclusion, college savings are indeed considered assets in the realm of financial planning. While they may impact financial aid eligibility, they also offer numerous advantages for families planning for higher education expenses. By recognizing college savings as an asset and incorporating them into a comprehensive financial plan, families can navigate the complexities of funding education while pursuing broader wealth management goals.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.