The following blog post was written by our interns, Mauria Ferrell and Brady Gray.
Saving for college can be a very stressful process, especially if you aren’t using the tools to your advantage. Today, you will learn about different ways to save for college, and you can pick the one that makes the most sense to go with your financial life.
When discussing saving for college, you have probably heard about 529 college savings plans. 529 college savings plans are tax advantaged investment accounts that let you save and invest for your child’s education. They work very similarly to a Roth IRA. You are investing “after-tax” (after Federal taxes – states may offer a state tax benefit for savers) money, but it grows tax free, and you can withdraw it tax free when paying for higher education expenses. Each state has its own 529 plan that may offer unique tax advantages.
It is important to know that money in 529 plan can only be used for what is considered qualified education expenses. While this might sound very limiting, in actuality, this money can be used for almost all college costs. It can be used to pay for everything from tuition to housing to computers. For more information on what is considered a qualified expense, search on your college or university’s website to find the cost of attendance.
Mississippi has their own college savings plans through the treasurer’s office. They are the Mississippi Affordable College Savings Plan (MACS) and the Mississippi Prepaid Affordable College Tuition Plan (MPACT). Each of these plans have different advantages to offer.
The MACS plan is a savings account that anyone can open for a particular beneficiary, and you only need $25 to get started. Mississippi taxpayers may deduct up to $10,000 from their state income taxes for deposits. The deposits can be invested, or just saved as cash if the beneficiary is closer to college age. The growth is tax free as long as it is used for qualified education expenses.
The MPACT plan is much different. The main advantage to this plan is that it allows you to lock in today’s tuition rates and begin paying in advance. The sooner you open this account, the less your payments will be. Contributions to this plan can also be used to lower your state income tax.
Overall, these are two great plans offered by the state of Mississippi. Talk with a financial advisor to see if this is an appropriate account for you and to see how much you should be saving.
If these are not an option for you, there are other grants and scholarships to consider. Unlike loans, scholarships and grants do not have to be paid back. There will be many scholarships offered by the college your child wants to attend and most of them will require essays. Most scholarships are awarded for academic and athletic achievements, extracurriculars, and community service and will require essays.
The main difference between scholarships and grants is financial need. Grants take into consideration the family’s financial situation. The most well-known grant is the Federal Pell Grant. By filling out the FAFSA(Free Application for Federal Student Aid), the government grant programs award money based on their financial need. The current maximum Pell Grant is worth $5,775. The amount they get from the Pell Grant is not affected by any other financial aid they are awarded. The FAFSA must be filled out every year for your child to receive grants or loans.