Ask An Advisor: How Can I Afford My Child’s College Costs?
I’d like to pay, or help pay, for my child’s education, but I don’t want to compromise my financial stability (now or later). What options do I have?
Now that summer is officially ending, a lot of families have switched from juggling careers, vacations, and summer camps to juggling careers, school schedules, and kid’s sports. And it’s a common time of year for many people to start thinking about future education funding for their kids.
Many parents I work with are dedicated to providing some education support to their children. But there’s still a lot to think about. It can be very expensive and it can seriously impact your own retirement. It’s important to continue to protect your retirement savings and stick to a budget even as try to cover some or all of those college expenses.
There are several different options for funding education that can help, so let’s review some of the basics.
Pay out of pocket as expenses occur
If you have the cash flow, great! But many people don’t, especially with multiple children in school at the same time. Also, by waiting to save, the potential for future income fluctuations may impact later years. This option also does not have the tax advantages of a Coverdell or 529.
Coverdell Education Savings Account
If you’re planning to send your child(ren) to a private primary/secondary school, this is one to check out – unlike 529’s withdrawals for qualified education expenses can include K-12 expenses in addition to college and graduate school. Its main drawback is that only $2,000 per year can be contributed per child, and there are income phase-outs for the ability to contribute. IRS Coverdell Information
Also keep in mind that contributions must be made before the beneficiary reaches age 18, and the account holdings need to be used before the beneficiary reaches the age of 30.
In terms of investment options, Coverdell accounts are very flexible, although the relatively low balances may limit some investments to maximize diversification.
For purposes of financial aid, the balance of the Coverdell is considered an asset of the parents.
529 College Savings Account
529 Plans offer higher non-deductible contribution limits than other options – some plans allow $300,000+ per beneficiary. Earnings are excluded from income when used for qualified higher education expenses including: tuition, fees, books, computers and related equipment, supplies, special needs; room & board for at least half time students.
Contributions are subject to the annual gift tax limits (currently $14,000), however, the IRS allows pre-gifting up to 5 years, if no other gifts are made to the beneficiary during the 5-year period and the donor lives 5 years. Parents, aunts/uncles, friends (very good ones!), and grandparents can all contribute! Another bonus – there are no income phase-outs or limitations on income to contribute.
Balances can be used for undergraduate and/or graduate programs. Beneficiaries can be changed within the family. If there is a remaining balance, or a child decides not to attend college, that’s a handy option!
Investments for 529 accounts are limited to mutual funds available in the plan chosen. Since only one rollover to a different plan is allowed per year without triggering a 10% penalty on earnings, it’s important to carefully evaluate fees and investment options for the plan chosen.
For purposes of financial aid, the balance of the 529 is considered an asset of the parents.
529 Prepaid Tuition Plans
Just a quick note – many states have discontinued Prepaid Tuition Plans. Generally, they are more restrictive than College Savings Plans and that has led to their decline. If you have specific questions regarding the differences between a 529 College Savings and Prepaid Tuition plan, please contact your financial advisor or plan administrator for more information.
As of 2012, 57% of undergraduate students received some form of federal financial aid, including federally subsidized loans, work-study funds, and grants. When it comes to aid, the devil really is in the details! Use the resources of high school counselors, community resources around the Free Application for Federal Student Aid (FAFSA), and resources from the college of choice.
Don’t let the sticker price of a college or university keep you from looking into it. Research their typical aid packages. Sometimes the out of pocket cost to a higher ‘sticker price’ school can be less than the out of pocket cost for another school with lower published rates! Check out this site to search by several factors, including the availability of aid: Big Future by The College Board
Every parent’s dream is to have their child qualify for a scholarship! A question that comes up often is, “what happens to a 529 if my child receives a scholarship?”. Great question! You have a lot of options: you can change the beneficiary to someone else in the family, keep the 529 in place in case the scholarship recipient decides to go to graduate school, or withdraw the funds. Receiving a scholarship is one of VERY few exceptions to a 10% penalty on earnings when funds are withdrawn for anything other than qualified higher education expenses.
The bottom line: It would be great to use Spock-like levels of logic when making decisions about your children’s education. At the end of the day though, it’s important to keep in mind that there are a lot of ways to pay for education, but only one way to pay for retirement and health related expenses. Please consider your own financial health a top priority!
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Jennifer Harper, MBA, CFP® is the Founder and Director of Bridge Financial Planning, LLC, which provides fee-only financial planning & investing services. She is also an adjunct instructor for the University of Tennessee at Chattanooga College of Business, teaching Small Business Finance, and the founding director of Common Cents Financial Literacy, Inc., a nonprofit organization founded in 2005 to promote and encourage financial education. Connect with Jennifer at BridgeFinancialPlanning.com or on Twitter @BridgeFinPlan
All written content is for information purposes only. Opinions expressed herein are solely those of Bridge Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.