Ugh! Since 2008 the phrase has become both cliché and more applicable than ever in so many areas of finance and life, and college tuition and financing seem to experience a new-new normal every year. It is now very normal for most high school seniors and their families to come face to face with some very difficult choices, and some very long-term financial consequences.
The average annual tuition expense is $23,000 in-state; $36,000 out-of-state; $45,000 -$55,000 private.
The average debt of a four-year college grad is $30,000.
*The list of not-so-fun facts is actually quite a bit longer. However we decided for the purposes of this blog to focus on a few strategies for those with time on their side to plan for their children’s education.
With that in mind, here are some plans and options for you to prepare ahead of time for the cost of college and keep debt at a minimum.
College Savings Plans & Differentiations
1. 529 Savings Plans
Setup & Funding
A 529 Plan may be setup by the owner for a beneficiary of any age, for any school that is an accredited post-secondary institution.
The owner of the plan maintains control of the assets and determines when withdrawals are made.
Contributions are made after-tax (non-deductible) and withdrawals used for qualified education expenses are typically tax-free at both the federal and state levels.
Contributions are considered a gift to the beneficiary and are therefore subject to the current IRA annual gift tax limits. While there may opportunities to “front-load” or “super fund” these plans with up to five years of contributions made all at once, it is very important to check individual state restrictions.
Important – 529 Plans are state specific and some states may allow a deduction for contributions and while others may allow tax withdrawals.
Use & Distribution
Qualified expenses include: Tuition, room and board, and books. Any non-qualified expenses are subject to a 10% penalty plus ordinary income tax.
529 Plans may be assigned to a second beneficiary (blood relative).
2. Coverdell Education Savings (CESA)
Setup & Funding
A CESA may be setup by the owner for a beneficiary and used for primary, secondary, or higher education expenses.
The owner of plan maintains control of the assets until the beneficiary reaches adulthood (the “age of majority”).
Funding CESAs are limited to a few thousand dollars per year and typically have income limits for the donors.
Use & Distribution
Qualified expenses include: Tuition, room and board, books. Any non-qualified expenses are subject to a 10% penalty plus ordinary income tax.
3. UTMAs (Uniform Transfer to Minors Act)
It is important to carefully consider establishing a UTMA as student’s assets are assessed in most aid formulas at 20% or 25% a year as opposed to a 529 Plan or Coverdell which will likely only reduce your eligibility for need-based aid by a maximum of 5.64%. Therefore, unless you are very sure your family and student will be ineligible for financial aid the UTMA may be more of a liability.
529 Plans – Some things to know
Savings in a 529 plan may be used for almost any post-secondary education.
While there may be advantages to opening a 529 plan in your state, you have the option to shop around. You may find plans with lower fees, or more investment options in another state. And, you can spend the funds withdrawn from the plan almost anywhere, including some international institutions.
I welcome your comments and questions about college costs and savings strategies below, or privately by way of email. And if you’d like help planning for your dependent’s education, please let us know.