Despite all the ratchet jawing by politicians every election cycle, one thing is clear. American families are not seeing much progress in the way of making college more affordable. In fact, here in California, our UC system just announced new tuition increases! True, some junior colleges are finally offering free or reduced tuition, but not nearly enough institutions do so. Many Gen-X and Millennial parents do not want to see their child leave school with the tremendous student loan debt we hear so much about. Among parents, 529 plans have become the go-to product for saving and investing in their child’s future. But is this the best approach?
First, let’s review what exactly a 529 plan is and why it’s so popular. Technically speaking, a 529 plan is a tax-advantaged savings plan, a qualified tuition plan if you will, and is designed to encourage saving to pay for qualified education expenses. Owners can pay for K-through-12 private school tuition, up to $10,000 per child, per year, for each account. But the original intention of the 529 plan was to pay for higher education. Owners can pay for college qualified education expenses (without the $10,000 cap). 529 plans allow you to save over time, invest in target date funds, or other equity indices, and they can provide tax benefits when the account distributions are used for qualified education expenses. If not used for qualified expenses, there is tax and a 10% penalty on the growth aspect of the distribution. Owners and beneficiaries can be changed, and the accounts can continue to grow to be used for future beneficiaries. If the distributions are used for qualified education expenses, any growth included in that distribution can be tax free! Hence their popularity.
From an education and tax planning perspective, a 529 plan can be ideal. I actually really like it. However, I always caution parents that despite wanting what’s best for their child, they should always save and invest for their own retirement first. Your own financial independence in retirement is the best gift you can give your child.
If you do go the 529 plan route, you don’t have to focus on funding 100% of your child’s future need. You can target a lower amount, say 50% or 75% and plan for scholarship, grants, and if needed, loans. Contributing half or more is still a tremendous burden lifted from your future obligation. Remember, save for yourself first, and then contribute any extra you have to your child’s 529 plan. Let’s look at some other options for saving and paying for a child’s education?
From an investment perspective, the Uniform Gift to Minors Act/Uniform Transfers to Minor Act (UGMA or UTMA) are accounts that allow you to save and invest for a minor. The accounts are more flexible than a 529 plan because the beneficiary can use the funds for whatever they want once they come of age. And that's the downside! At the age of majority (usually 18, but some providers may allow up to age 21), your child will legally have access to and control over the account and are free to spend the money however they see fit. Some have jokingly referred to these accounts as sports car funds. With this account, there is no tax-advantage either. Distributions are taxable.
Free or Low-cost Degrees. As noted earlier, some two-year colleges now offer free or reduced tuition. By attending one of these two-year programs first, and then transferring to a traditional four-year college, you can greatly reduce the expense of college. Qualifying for this tuition could be challenging. For some programs, you must be a resident in that school’s district for at least one year. For example, City College of San Francisco actually requires you to be a resident of California and of San Francisco for one year and one day prior to determining eligibility.
Go Global! Germany, Iceland, and Norway offer free tuition, even to Americans, and the courses are in English! You do have to pay living expenses and some annual school fees, but the cost could still be much less than paying tuition here in the US. Austria, France, Luxembourg, and Spain also offer low-cost tuition and courses in English. As an added bonus, you graduate with some international experience just by earning your degree abroad. Learn more at StudentLoanHero.com https://studentloanhero.com/featured/6-countries-with-free-college-for-americans/ As an added bonus, if the school is approved under Title IV (Higher Education Act (1965)), and you are enrolled at least half-time, you may be able to pay tuition and other qualified expenses with 529 funds.
Accelerated 4+1 Option. Some universities now offer an undergrad and masters with a 4+1 option. Your student can earn their undergrad and masters in just five years! If you have the time and ambition, this could be a money saver in the long run. Check out this article from Noodle.com https://www.noodle.com/articles/the-smartest-and-fastest-way-to-earn-your-bachelors-and-masters-degree
Those are just a few ideas for funding higher education. Personally, if I had it all to do over again, the idea of studying abroad and receiving a degree for basically free plus transportation, administrative fees, and housing, is very appealing. The 4+1 Option is also very appealing!
When it comes to saving and paying for higher education, to me, the 529 plan still comes out ahead. The plan offers lots of flexibility and tax advantages when utilized properly. The UGMA/UTMA would require a huge amount of trust and financial education to be sure your child fully understood what it’s for. There’s also the tax consideration and the fact that if they did take a big distribution to buy a car, a home, crypto currency, or invest in their best friend’s gluten-free-organic-goat-yogurt-magic-beauty-cream start-up, you don’t have the right to prevent them from doing so. It’s their money once they attain age of majority. With a 529 plan, you remain in control as the owner of the account.
Education planning is a part of one’s overall financial planning. As an independent CERTIFIED FINANCIAL PLANNER™, I can help you. Contact me and let’s get started on building a better future. #talktometuesday #retirement #Credit #529Plan #UGMA #UTMA #CFPPro #moneydolist #College #tax