Back to School: Six College Funding Options
As summer ends and the kids return to school, parents look forward to getting back to a normal routine. A day will come, however, when high school will be over. The next step, for many graduates, will be college or another form of higher education. It will be exciting . . . and expensive! As a financial planner, and a parent of three, I am very mindful of those future (and rising) college costs and the responsibility to help my children. If you are in a similar situation, here are some strategies to consider:
529 Savings Plans – All fifty states sponsor these special investment accounts. Any earnings grow tax-free as long as the money is used for qualified college expenses. The contribution limit is very high (up to $350,000 per beneficiary). You also maintain control over the account. If the child named as the beneficiary doesn’t go to college, you can transfer it to another child. If the money invested in a 529 isn’t used for college, you can get it back, but you could owe taxes and penalties. (www.collegeinvest.org)
Prepaid-Tuition Plans – If you plan to send your child to an in-state school, many states offer the option to pay tuition in advance. The key benefit is the ability to “lock-in” current tuition rates by making a lump sum payment, or payments, over time. If your child doesn’t go to college, there are options for getting a refund, which vary by state. There are also college plans available that can be used at some 270 private colleges and universities (www.privatecollege529.com).
Custodial Accounts – UTMA and UGMA accounts (Uniform Trust/Gift to Minor Act Accounts) are custodial accounts managed for the benefit of a minor by the account holder. There are no restrictions on the amount of money that can be contributed. When monies are deposited into one of these types of accounts, it is considered an irrevocable transfer of assets to the child, in other words, you cannot take the money back. While held in the custodial account, funds must be used for the benefit of the minor. The child automatically becomes the owner when an adult. It is now his or her money, and it can be used for college tuition, room and board, or a car!
HELOC – As real estate value continues to recover, a Home Equity Line of Credit (HELOC) could be a flexible source of funding for college expenses. Yes, it is a loan and you have to pay interest, but you can maintain a great deal of flexibility and control. Monies that you would have set aside with the other plans can be used to build up the equity in your home (to be drawn against later with the HELOC) or otherwise invested.
401(k) Loan – If you saved up a substantial amount in your retirement account by the time your child reaches college age, you have the potential to loan yourself money. Loan provisions vary widely, so you’ll need to check with your 401(k) provider for the specific terms.
Brokerage Account – It doesn’t get any simpler than opening an investment account to save for your children’s college expenses. You’ll probably have taxes to pay on earnings and gains along the way (that would be better than deducting losses), but you own the account and maintain maximum control and flexibility. If your child runs off and joins the circus, you can “re-purpose” the account for your retirement − or a new BMW!
Many choices exist for funding a college education that I haven’t addressed, including student loans, financial aid and scholarships. Visit www.collegeinvest.org for more information. Each family’s circumstances and resources will dictate the best strategy. If you are unsure, ask a financial planner to assess and advise you on your situation. (Thanks again, Mom and Dad, for the education. I think it is really paying off!)
David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.