College Planning
The cost of higher education is skyrocketing. Tuition increases are rising faster than the rate of inflation and outpacing increases in family income. In the last three decades, tuition costs have risen by roughly 25.3% at private colleges and 29.8% at public colleges. If this trend continues, the inflation-adjusted price of an undergraduate education could more than double by the time your children or grandchildren are ready for college.
Take the guesswork out of planning for college
Most of us have competing financial priorities, like saving for retirement, which can complicate financial decisions. That’s why saving for college isn’t enough—you also need a plan! We can help you with a range of college planning issues, including:
- Maximizing financial aid
- Utilizing tax credits and other tax strategies
- Reviewing all funding strategies, including smart loan strategies
- Appealing financial aid offers
- Learning the best places to find grants and scholarships
Let’s look at some of the most common college planning strategies and how you can start preparing for your kids’ college.
529 Plans
When it comes to college planning, you’ve probably heard of a Section 529 College Savings Plan. 529 Plans are the go-to education savings accounts. This is due to their massive tax breaks and, now, the flexibility to include K-12 expenses in addition to college expenses.
These state-sponsored plans offer flexible, tax-deferred ways to save. While contributions to California’s 529 plan aren’t tax-deductible, earnings grow free from state and federal taxes. However, other states allow you to deduct your contributions for state income tax purposes.
In general, a 529 Plan includes benefits like:
- Significant tax benefits
- The freedom to contribute large amounts
- Possible estate planning benefits
- Full control by parent or grandparent, not your beneficiary
- Flexibility in education expenses, including K-12 and vocational school
How much does college cost?
When babies born in 2021 turn 18, the sticker price of a four-year college degree could reach a quarter-million dollars at public universities, and half a million dollars at private universities. If you have more than one child, you could be facing a bill that easily reaches seven figures!
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529 Savings Plans vs. 529 Prepaid Tuition Plans
There are two main types of 529 Plans, each with their own benefits and drawbacks.
529 Savings Plans
Think of these plans like education-oriented 401(k) plans; you can invest your contributions in a preselected set of mutual funds. Your account balance rises and falls based on how much you contribute and how well your investments perform. The money in your account can be used at any time for qualified education expenses.
529 Savings Plans
Think of these plans like education-oriented 401(k) plans; you can invest your contributions in a preselected set of mutual funds. Your account balance rises and falls based on how much you contribute and how well your investments perform. The money in your account can be used at any time for qualified education expenses.
In general, 529 Savings Plans are more flexible, more widely available, and make more sense for most families.
That’s why we’ll focus specifically on 529 Savings Plans.
Pros and Cons of the 529 Plan
PROS
CONS
UGMA/UTMA Custodial Accounts
Another option to consider is a custodial account, as established by either the Uniform Gift to Minor Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). While not specifically designed for educational funding, UGMA and UTMA allow you to accumulate funds in your child’s name.
Though you’re funding an account for a child, the child’s access to the account is limited until they reach the age of majority—usually 18 or 21.
As the named custodian, you control the account until the child is no longer a minor. At the age of majority, the custodial relationship ends and the child assumes control over the account.
Pros and cons of the UGMA/UTMA Custodial Account
Another option to consider is a custodial account, as established by either the Uniform Gift to Minor Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). While not specifically designed for educational funding, UGMA and UTMA allow you to accumulate funds in your child’s name.
Though you’re funding an account for a child, the child’s access to the account is limited until they reach the age of majority—usually 18 or 21.
As the named custodian, you control the account until the child is no longer a minor. At the age of majority, the custodial relationship ends and the child assumes control over the account.
PROS
CONS
Alternative College Planning Methods
While not specifically designed for higher education planning, you can pay for education expenses through other strategies.
Contact us today to figure out the best strategy for paying for college.
You can make withdrawals from your IRA to pay for qualified college expenses. The 10 percent penalty tax is waived, but you’ll still have to pay income taxes. When weighing whether to dip into your retirement savings, understand that any disbursements may count as income and affect your child’s eligibility for need-based financial aid.
If you need more money to pay college expenses, you can borrow from your 401(k) or 403(b) plan. In general, loans from these accounts will charge one to two percent higher than the prime lending rate. Although interest charged is deposited into your retirement account, you’ll lose out on the benefit of compounding interest. The loan must be repaid in five years. If you lose your job, the loan may be due immediately.
Most people associate life insurance with the death benefit paid out when the insured dies. While the death benefit is a useful feature, it can also be used to fund higher education costs. It’s not recommended to buy a policy for the sole purpose of college savings, but the cash value of your whole, variable, or universal policy can be used to pay for such expenses.
Take the guesswork out of planning for college
What should you expect when planning for higher education costs? What are the different 529 options, rules, and regulations? How can you find scholarships and grants?
We’ll help you make sense of it all when deciding which of these is right for you and your family.
Get in touch today to start the conversation!
Create an educational legacy
By taking a proactive approach to college planning, we can help you minimize your concerns about tuition bills or family debt.
Get in touch today to discuss whether a 529 plan is right for your family!
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