If you’re a parent and plan to pay for your children’s education, what’s your financial education funding strategy?
If you don’t have an answer to this question, you’re not alone. In fact, according to a recent study, most Americans preparing a loved one for college have just enough money saved to barely cover the tuition and fees for one year at a four-year public college for in-state students. (As if getting your student through school and preparing him or her for college isn’t enough!) Planning for the expenses of a college education may not have been a top priority during the early years of your student’s life, but there’s no reason to continue to put it off. PAX Financial Group can help.
Perhaps you started a savings account for this purpose, but you haven’t contributed as much as you’d planned. Or maybe you had a solid strategy, but your student’s plans changed, and now you need to rethink your plan. Regardless of the specifics, if you find yourself now in need of a financial education funding strategy, please continue reading.
As a parent myself, I know how important a good education is. And at PAX Financial Group, we help clients with education planning all the time. As a big expected expense, we often work this into a client’s overall comprehensive financial plan so they don’t find themselves in this situation. (Again, this is also why an annual review of your plan is important – so we can discuss plan changes early on and adjust where necessary.)
For parents, caregivers or close relatives who intend to contribute to a loved one’s college finances, where to begin can be a daunting task. The good news? No matter what your financial situation or how many years until college starts, there’s a way to make it happen.
Before getting started, it’s important to know in which way(s) you plan to support your loved one. Here are some strategies to consider:
- Will you be paying a college directly or gifting to the loved one who will then take care of the expenses themselves? If your student is currently enrolled in college, you can contribute directly to the college or university they attend. This could be done in an effort to ensure the funds are being used as intended, as well as for the purposes of tax reporting. You can also provide financial support through an estate plan to make sure your educational contributions are allocated per your wishes after your passing.
- Do you have any assets earmarked to fund this goal? Below we break-down some of the types of accounts that you may already have or want to consider.
According to the SEC, A 529 plan is known as a “qualified tuition plan” and is a savings plan with tax advantages designed to encourage saving for future education costs. There are two types of 529 plans: Prepaid tuition plans and education savings plans.
Prepaid tuition plans, as the name implies, are plans that allow the purchase of credits at participating colleges or universities at current prices. Please note that these plans are typically honored by state, and usually only by public universities. They usually cannot be used to pay for future room and board.
Education savings plans let a saver open an investment account to save for the beneficiary’s future qualified higher education expenses – tuition, mandatory fees and room and board. These plans can generally be used at any United States college or university and sometimes abroad.
Because of the differences between these types of plans, if you already have an idea of which college or university your loved one plans to attend – or at minimum, the state in which they will attend – you can make a more informed decision on your savings strategy.
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts, originally known as education IRAs, are similar to 529 plans, with one very important exception: They can also be used for elementary or secondary school costs. This is a very important distinction for anyone looking to fund a student in a private elementary or lower school.
UTMA/UGMA Custodial Accounts
According to FINRA, Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are special accounts that allow a minor to own or be the beneficiary of the account, but the custodian acts in the child’s interest and makes all investment decisions on the child’s behalf until he or she reaches the age of majority in the state they reside. This age typically ranges from 18 to 21 years old, depending on the state. Keep in mind that these types of accounts are considered assets of the student they are benefitting and can count against any income-based financial aid eligibility.
Unlike other accounts, such as 529 and Coverdell plans, these types of accounts cannot be transferred to another child/student or change beneficiaries in any way.
While this is an overview, there are many differences (some large and some small) between specific types of educational savings plans. If you are looking to find the best plan for you and your loved one, do your research – and then reach out to your financial advisor to find the right type of education savings strategy for your situation.
Tips to Help Grow These Accounts
Once you have settled on the right type of savings plans, you can watch it grow. In addition to your planned contributions, consider these additional ways to help grow your loved one’s education fund:
- For young children, ask for contributions in lieu of birthday and holiday gifts.
- Encourage older children with jobs to make a percentage donation of every paycheck toward their education fund – an additional incentive could be to offer to match it.
- Start a spare change jar and empty it periodically to contribute to the plan – small change adds up over time.
What About Post-Graduate Education?
It’s important to not only consider the cost of a traditional two- or four-year degree, but also the likelihood of your student attending any level of graduate school.
According to the New America Foundation, the median debt for graduate students is $57,600, with one in four borrowers owing about $100,000 or more. Without a college savings strategy, your student could end up with this much debt or more, depending on the type of graduate degree they work toward.
Paying for someone’s education is a common goal for many parents, grandparents and other caregivers. And while the cost of a continued education can seem overwhelming, the alternative could be your student taking on the burden of interest-ridden student loans that can take decades to pay off, or not obtaining a college degree at all. Setting a plan in place now can make a college education a much easier goal to meet in the future.
Your financial advisor can help you make a plan that fits your needs, financial situation and education timeline. Don’t put it off any longer.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.