Imagine staring into the beautiful eyes of a newborn child, hopeful of all the promise that comes with a brand new life. You might start to think about the person that this child will one day be: their dreams, aspirations, and all the future holds. Fast forward a couple of years to the child’s first day of kindergarten. It’s sobering to think that while they’re learning reading, writing, and arithmetic, college will be here before you know it.
Figuring out how to pay for college can be overwhelming, especially given the rise in education costs. Education planning is a proactive approach to securing a child’s future. By starting early and making informed decisions early, you can significantly reduce the financial burden of higher education. We’ll explore the importance of early planning, investment strategies, and other tips for achieving your education goals.
Soaring Education Costs
The cost of a college education has steadily increased over the past decades. According to Business Insider, the average cost to attend a 4-year public college or university is over $11,000 per year for in-state residents. This number almost triples to over $30,000 for out-of-state residents. Private institutions have an average tuition of over $43,000, with some as high as $71,000 per year. These numbers don’t account for room and board, books, and other fees that can add significantly to the overall cost.
Financial aid, through scholarships and grants, is becoming increasingly less available. As a result, many students are forced to rely on student loans to fund their education. The average student loan debt for graduates with bachelor’s degrees was over $29,000, according to the College Board. This number can be even higher once you factor in graduate school or advanced education, such as medical school or law school.
Starting your child’s education planning early can help reduce the burden of paying for college. By consistently depositing to an education savings plan, over time, you can accumulate a substantial sum of money to cover college expenses. Additionally, early planning can help you and your family avoid relying on student loans, which can have long-term financial implications.
Investment Vehicles for Education Planning
Let’s explore some investment approaches available as part of an educational planning strategy:
529 Plans
Named for a section of the IRS tax code, 529 plans are tax-advantaged savings plans designed specifically for educational purposes. Contributions to a 529 plan are made using after-tax dollars. As the money is invested, the account grows tax-free, and any withdrawals made for qualified education expenses are also tax-free. These plans are available in one of two forms:
- Prepaid: This plan allows you to buy credits for future tuition at today’s rates, making it a solid plan against tuition inflation. A prepaid plan may be administered by the state or a higher education institution.
- Savings Plan: Unlike a prepaid plan, a 529 savings plan growth is driven by the market performance of its investments. These plans are administered by states.
Both types of 529 plans have their advantages and disadvantages. Prepaid plans are not available in every state and are limited to tuition alone, while an education savings plan can be used for room and board, books, and other expenses. A prepaid plan can help lock down future tuition costs, while the investment returns on a savings plan may not keep pace with tuition increases.
ESA (Educational Savings Account)
Sometimes referred to as a Coverdell Education Savings Account, an ESA is a great option when saving for your child’s education. This is because you can invest in it like an IRA, which adds exponentially more options when compared to a 529. The main drawback is that an ESA is subject to income limits and only $2,000 per year can be contributed.
Custodial Accounts
A custodial account, such as a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account, allows you to invest money on behalf of a minor. Unlike 529 plans, UGMA and UTMA accounts can be used for any purpose, including college education or buying a home, once the child reaches the age of majority (the legal age of adulthood). These accounts can grow over time due to investments in stocks, bonds, and mutual funds. One of the main tax benefits of a UTMA account is that the first $1,250 of a child’s income is tax-free. The next $1,250 is taxed at the child’s rate, and income over $2,500 will be taxed at the parent’s rate.
While both 529 plans and custodial accounts are considered part of the student’s assets, UGMA and UTMA accounts usually factor more significantly in financial aid and may lower a student’s eligibility.
Strategizing for Education Planning
Just as you would approach investment or retirement planning with a strategic mindset, education planning benefits from the same level of attention. Getting started early can help you and your family prepare for a bright future that includes a college education without taking on significant debt.
A fiduciary financial advisor can help you develop a personalized education planning strategy, taking into account your unique financial situation, risk tolerance, and long-term goals. They can provide expert guidance on investment options, tax implications, and other important factors.
Are you ready to get started? Contact us today to learn more about education savings plans and other investment vehicles for higher education.
