Q: What is a college savings account and how does it work? What are the different types of college savings accounts?
A: College savings accounts, or CSAs, are broadly defined as long-term savings accounts administered by banks, nonprofits, school districts, cities or states that help children from birth to 18 save for tuition and other expenses related to higher education.
There are several types of college savings accounts, the most popular being “529 plans” which are tax-exempt accounts with investment options so money can grow over time. Some families put money into Roth IRA accounts to pay for college, which allows a student to take out money for higher education expenses penalty-free, though they would owe income tax on an early withdrawal.
Coverdell Education Savings Accounts operate like 529 plans and Roth IRAs — students can invest and withdraw from the accounts tax-free, though there are limitations based on income and contribution amounts.
The state and local districts are moving to create these accounts for mostly low-income schoolchildren.
Q: Can college savings accounts impact financial aid eligibility?
A: This depends on the type of savings account, who owns the account, when withdrawals are made and the type of financial aid you are applying to.
529 plans, for example, could impact the amount of financial aid a student may be eligible to receive. If a student is considered a dependent for tax purposes, the 529 account will be considered a parent asset on the FAFSA (Free Application for Federal Student Aid). But the impact is generally low.
The impact depends primarily on the value of parents’ assets. That value will determine a student’s expected family contribution, which is the amount of money that colleges expect a student’s family to contribute for out-of-pocket for college expenses.
A certain amount of parent assets (determined by the older parent’s age) are sheltered under the FAFSA’s asset protection allowance. A maximum of 5.64% of the value of any remaining parents assets then counts toward the student’s expected family contribution. The allowance has decreased to $9,400 in 2020-21 and is expected to increase slightly to $10,500 in 2021-22.
If a parent makes under $50,000, however, no assets are taken into account when a student applies for federal financial aid.
It’s best to also consult with the schools the student is applying to, as colleges and universities will often go through their own process in determining how to allocate student aid from that specific campus.
Q: Do college savings accounts for another child in the family impact eligibility for the child applying for college?
A: When applying for aid by completing the FAFSA, a parent’s assets include all 529 plans they own. Any 529 plan owned by a different family member, such as a grandparent, is not reported as an asset on the FAFSA application.
Q: What is Gov. Gavin Newsom’s proposed college savings account program?
A: As part of his May budget revision, Newsom proposed using $2 billion in federal stimulus funding to give $500 college savings accounts to the state’s 3.7 million students from low-income families during the fiscal year that starts July 1. After the first year, the statewide program would start college savings accounts for every incoming first grader from low-income families funded by $170 million from the state general fund.
Though similar, Newsom’s proposed college savings accounts are not technically 529 accounts. According to the draft bill’s explanation for the program, the funds are not transferable to anyone else and can only be used for documented higher education costs. Undocumented students would also be eligible for the program, which would follow state and federal privacy laws, meaning that their applications would not be shared with other government agencies.
Q: What is the Legislature’s response to Newsom’s plan?
The Legislature’s budget proposal, which both the state Senate and Assembly will vote on in the coming weeks, scraps Newsom’s plan. Instead, $950 million in federal funding would bolster an existing college savings program: CalKIDS, which kicked off this year. It automatically provides each child born in California with a minimum of $25 to invest in the state’s existing 529 college savings plan, ScholarShare 529.
Q: Do college savings accounts help families save for college?
A: Researchers say that a low percentage of families who are given the accounts end up adding money to them, and most who do tend to be wealthier, according to a 2012 report from the U.S. Government Accountability Office. The report found that in 2010, less than 3% of families in the U.S. contributed to a 529 plan or Coverdell Education Savings Account.
But, those promoting the accounts tout them as helping low-income families aspire toward college education for their children. Research published in April by Washington University’s Center for Social Development found that families with college savings accounts are more likely to have thought about and prepared for college and its costs. In 2010, Washington University researchers found that students with college savings accounts were seven times more likely to attend college than students who did not have them and that whether student had a college savings account in their name was more of a predictor of college attendance than family income, household net worth or parent savings.
Families who aren’t able to save much for college would likely have to rely on financial aid and loans to cover the remaining cost.
Q: What is tuition at CCC, CSU, UC?
A: The average tuition cost for California community colleges in 2021 is $1,458 per year for in-state students, according to Community College Review. For California State University in-state undergraduate students pay the same systemwide tuition fee of $5,742 per academic year for more than six units and $3,330 for undergraduates enrolling in six or fewer units. Tuition and fees for the University of California system were $14,100 for in-state undergraduates in 2020-21.
Q: L.A. Unified is launching its own college savings account program for first grade students. How will that program work?
A: The program, called Opportunity L.A., will be the largest school district college savings account program once it enrolls all first grade students attending schools within the district.
Every student will automatically be given $50 in a Citibank deposit-only savings account. The first deposits will be made in June for more than 13,000 first graders deemed to be in the greatest need in 196 of the district’s 1,413 schools. This first group of students has been identified based on the district’s Student Equity Needs Index that measures a wide range of student needs by tracking the percentage of students who may need additional support that each school enrolls.
By the end of 2021, all first grade students are expected to be enrolled in the program regardless of the school they attend. All eligible families will be automatically enrolled but may opt out if they wish.
In contrast to other college savings programs in the state, however, Opportunity L.A.’s initial seed funding will be deposited into deposit-only savings accounts rather than 529 accounts. This would make it easier for undocumented families to partake in the program, according to representatives from the city and the district, by removing the need to provide additional documentation if they wish to access and deposit into their accounts.
You can read more about Opportunity L.A. here.
Q: Can students benefit from multiple college savings account programs?
A: Students may be eligible for various college savings account programs. In the case of L.A. Unified students, for example, many first graders will qualify for both the district and the state program if Gov. Newsom’s proposed budget is approved as it’s currently written. But details on how exactly students can benefit and access the programs they may be eligible for are expected if the state budget includes the accounts in the budget that must be approved by June 15.
Q: What happens with the money if the student doesn’t go to college or gets other aid or scholarships and doesn’t need the money?
A: Under Newsom’s proposed plan, the funds in the savings accounts would remain the property of the state until the recipient uses them for higher education or reaches the age of 35. If the funds go unused, the account will revert to the program’s fund and will be available for other children in the future.
For traditional 529 plans, like ScholarShare 529, if funds are used for something other than education expenses, the recipient will have to pay a 10 percent penalty as well as federal income taxes. If the beneficiary gets a full scholarship to college, the 10 percent penalty will be waived.
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