Education and Goal Funding
Education funding vehicles
Know 529 plans (tax-deferred growth, tax-free qualified withdrawals, state tax benefits, owner control, beneficiary changes), Coverdell ESAs (contribution limits, broad qualified expenses), and custodial accounts under UGMA/UTMA (irrevocable gift, child owns assets, affects financial aid). Understand the FAFSA treatment of assets and income; parental assets are assessed more lightly than student assets.
Financial aid basics
Expected Family Contribution depends on income and assets. Know the difference between grants, scholarships, work-study, and loans. Complete the FAFSA early.
Goal funding
For any goal, compute the required savings using time value of money. Education costs inflate faster than general inflation, so use an education-specific inflation rate. Account for the time horizon and the child's age.
Worked example
A child is 5 and college starts in 13 years. Current cost is $30,000 per year, inflating at 5%. Future cost = $30,000 × (1.05)^13 ≈ $56,600. For four years, the total need is roughly $226,000, which must be funded through savings, aid, and loans.
Traps
Questions confuse 529 qualified expenses, the tax treatment of nonqualified withdrawals (earnings taxed plus 10% penalty), and whether a custodial account hurts aid eligibility.