Hello to the month of May! I have a son graduating from high school at the end of month, heading to college and I became a Great Aunt over the weekend. What do both of these events make me think of?
How to Pay for College Education Without Going into Debt?
As of March 2018, according to the Federal Reserve, there are 44.5 million student loan borrowers in the United States that owe $1.5 trillion dollars[i]. Yes, that is a Trillion with a “T” folks. How did this happen?
I am guessing there might have been a lack of intentional planning and saving. I don’t think everyone needs to go to college but given the statistics, it appears a lot of people are going to give it a go, so let’s think about this topic.
How do we prevent our loved ones from going into debt to pay for college? Why should they start their adult life choking on college loans? The most obvious advice is to start saving and planning as soon as possible!
Plan for your children’s college education NOW!
As a Financial Planner,I am always thinking about finances. So when my children were growing up they were invited to some very elaborate birthday parties and I have to confess, in the back of my mind I was thinking, I hope they contributed this much money to their college account too.
Saving for college is like any other financial goal, start with what you can, try to save monthly and once you get in a habit you can increase your contributions. If you are curious about how much college costs these days or how much it will cost when your little baby is ready to attend, I would be happy to run a few future college calculation estimates for you.
College Education Choices
So if you are thinking this is something you want to save for, you’re probably thinking, what are my choices for college savings? As usual, there are many choices so I am going to give you a few to think about that I’ve seen clients have success with.
A college savings plan that is tax-advantaged if used for qualified college expenses like tuition, room and board, school fees, a computer and textbooks. Starting in 2018 the 529 now allows the owner to use up to $10,000 per year for primary or high school tuition only (not books, etc.)[ii]The money grows tax free and can be pulled out tax free as long as it used for qualified education expenses. Contribution limits vary but 529’s usually have one of the highest contribution limits. The children are beneficiaries and the plan owners keep control of the money. If the beneficiaries do not go to college the beneficiary can be changed within the family.
Save money in your name
If you aren’t sure of your child’s future plans there is no harm in saving the money in your name. You won’t have any tax advantages, but you will remain in control of the money and you will still be saving and avoiding debt which is a positive benefit.
The Coverdell ESA (Education Savings Account)
I hesitate to throw this account in the mix because it has several short comings—1stcontribution limit is $2000 a year and 2ndthe parents are subject to income limits that can phase out their ability to contribute (like a Roth IRA)[iii]. However, this account can be used for elementary and secondary school expenses that qualify, including school uniforms, tutoring in high school and college expenses like tuition and books. If you know you want to send your child to a private elementary or high school this could be an interesting solution.
The Roth IRA is another option that has some drawbacks, similar to the income limits on the family’s ability to contribute if their income exceeds the limits. Also, with the Roth IRA you are still subject to the contribution limits which are $6,000 in 2019, if you are under the age of 50. In order to withdraw from your Roth tax and penalty free, you can only take out the contributions, not the gains. Also, remember you are using your retirement savings and once the money has been used for education, you cannot put it back in your account.[iv]
UGMA-Uniform Gift to Minors Act or UTMA-Uniform Transfer to Minors Act
This account allows a minor to own securities without the expense of a trust. A few decades ago this is how you saved money for your children, some of the earnings were taxed at the child’s tax rate to a certain point so it was a way to save some money in taxes, the account does not grow tax free. The obvious problem is in the name: Gift to Minor or Transfer to Minor, at 18 or 21 depending on your state’s rules, the minor becomes eligible to claim the account. Some parents are concerned about giving up control at 18 or 21.
This is not an exhaustive list of options but I hope it will get you thinking about paying and saving for college expenses because trust me, this day will come sooner than you expected.
Do not hesitate to give me a call if you have questions or if you would like me to create some College Cost Estimations for you.