We have not really started the financial aid process yet and I highly doubt that my son will qualify for any “non-loan” type aid. However, we have saved in a 529 plan since he was a baby (knowing what I know now, I would have saved for his education using a Roth IRA plan, but that’s an entirely different subject). Here is the issue…he has applied at 5 schools. Two of the schools we could probably cover fully based on what we have saved and if he graduates in 4 years. The other 3 would probably require that he take out a loan of somewhere between $10K - $20K (again, if he graduates in 4 years). There is a decent chance that he is going to choose to go to one of the 3 more expensive schools. So, we would probably not know for certain how much of a loan he would need to take (if any at all) until his senior year in college.
So, the question is, does he apply for financial aid now? If so, and he qualifies for a loan, does he have to take it right away or is it like a line of credit that he can draw from any time while he is in school?
He has to apply for FA each year he wants it. If he needs $10-20K then he’ll need to do it multiple years. The max a student can borrow is:
Fresh - $5500
Soph - $6500
Junior - $7500
Senior - $7500
Conceivably he can just borrow in Junior and Senior years. Or he can work summer jobs to get the $.
I guess I have a lot to learn about student financing. I hear about students with $50K - $150K in loans. If those are the limits…then how do these students get that far in debt? What are the other sources for student loans…banks?
Nope. Here are two pretty good articles talking about using Roth IRA’s to pay for your child’s education, and you can find many more if you search. Much better option than a 529 plan. More flexible, better tax benefits.
The author doesn’t list the disadvantage of the tax-free withdrawal of principal being included as untaxed income on the FAFSA, unlike a 529 withdrawal.
Could wait until after the last FAFSA is submitted for the last kid and then withdraw Roth contributions.
“Yes, the owner of the Roth has to have earned income to make a contribution”
Doesn’t matter though. You can withdraw principal from your Roth IRA anytime within the first 5 years without penatly and make any distribution (Principle or earnings) after 5 years without penalty. Once you withdraw, its your money to do what you please with including paying for your childs education. Also, I have also seen on several web sites that you can withdraw from IRA’s to make qualified education expenses for you or your dependents.
Look at item 8 under “exceptions”. Now it does not specifically state it also applies to education expenses of dependents, but the other articles that I linked seem to suggest that this is allowable.
Also, what I said about the 5 year distribution is not correct, there are qualifications for that…but it appears you can withdraw or educational expenses anyways.
How do students get loans of $50k+? Those are almost always grad students you hear about having huge loans, but there are a few ways for undergrads to do it too. There is (was) the Perkins loan program that could add $4000 or so per year. Some parents don’t qualify for the Parent Plus loans, and the student then gets an additional $4-5000 per year. Some states have loan programs. Some schools have loan programs.
It’s not something you want to do, but there are ways for undergrads to get more than just the $28k in Stafford loans for undergrads.
For some people, maybe; for most people, probably not.
More flexible in that Roth distributions are not limited to qualified education expenses without a penalty being assessed on the earnings portion (although there are certain Roth restrictions that do not apply to a 529), and there are a much wider range of investment options for a Roth than for a 529. But better tax benefits? No way.
-Many states allow a state tax deduction for 529 contributions. There are no tax deductions for Roth contributions.
-529 distributions used for qualified education expenses are free from tax on the contribution and earnings portion of the distribution. A Roth distribution used for qualified education expenses will be assessed tax on any distributed earnings.
-Multiple people can make annual contributions up to the annual gift tax exclusion amount (currently $14,000) to any single beneficiary’s 529 account without any gift tax considerations. The maximum that can be contributed to any one Roth account is limited to $6,500 per year (and that’s only if the account owner is 50 or older; for account owners under 50, the maximum is $5,500).
-A 529 account owned by a parent or student is reported as a parent asset on financial aid forms, but qualified distributions from a student-owned or parent-owned 529 are not counted as income. As Madison85 points out, although a Roth account will generally not be counted as an asset for financial air purposes, Roth distributions will have to be reported as untaxed income on financial aid forms. Income is assessed for financial aid purposes at a much higher rate than assets.
-There are no income restrictions for those who open or contribute to a 529 plan. In order to be eligible to contribute to a Roth IRA, the account owner must not exceed certain income limits.
Your interpretation of the five year rule in post #10 is really messed up.
@Madison85 …read the rest of the post after “Doesn’t matter though” and my follow up post with links from the IRS regarding exemptions for educational expenses . Also, the owner of a Roth account can withdraw principal (contributed money) whenever they want without penalty and use it for whatever they want.
@BelknapPoint …yes, I realize my interpretation of the 5 year rule was wrong and I mentioned that in a follow up post!! It’s like you guys read the first sentence of a post and ignore the rest.
One of the the tax benefit is this… If you use 529 money to pay for education you then can not take tax credits for educational expenses that you could if you used Roth money. The state tax benefit is pretty minimal. For example, in my state, Wisconsin, you can take a tax deduction of up to $3,000 for contributions made to a 529 plan. The state tax rate is roughly 6%. So, that equates to a $180 tax break. I’d rather have the Federal tax credit.
I realize that there are limits to Roth contributions that are not there for 529 plans…but seriously, how many people are contributing more than 5K or 6K a year to their 529 plans?
In a Roth plan you can your investment options are pretty limitless. 529 plans have a limited list of available options and there are rules to how often you can rebalance your plan or change your investment choices.
“529 distributions used for qualified education expenses are free from tax on the contribution and earnings portion of the distribution. A Roth distribution used for qualified education expenses will be assessed tax on any distributed earnings.”
Not true. Read the exception rules direct from the IRS that I posted.