College Planning, maybe the scariest two words in the English language for parents. Where is the best place to save? How much do I need to save per month? Will saving prevent me from receiving financial aid? Personally, my son is completing his sophomore year of high school so college visits will be a top priority this summer and thinking about those bills are on my mind! For parents close to college or for those of you just starting out, I’ll give you some thoughts and advice on saving and planning over the next few paragraphs.
The most popular savings vehicle and the one dedicated specifically to education is the 529 plan. The advantages are two-fold: First, all growth in the account once you invest your dollars is tax free (similar to a ROTH IRA). Second, as the owner of the 529 plan you keep control of the account, meaning you can change beneficiaries as you see fit. This is in stark contrast to the UTMA (another once-popular savings vehicle) as the tax benefits are not there and the child can take over the account once they reach the age of majority in your particular state. A third option to save for college would be a cash value life insurance plan. When designed properly, these plans can build cash that you can utilize for college bills while also providing a life insurance benefit to make sure the plan is self-completing.
The reality is that as college costs continue to rise, 99% of my clients do not or will not have the entire college bill set aside in a dedicated savings vehicle. The question has morphed into how much can I set aside per month for college and still meet my investment, retirement and estate planning goals? As income goes up, so do our expenses typically, so we are prioritizing how to divide every dollar heading to our various savings plans. One alarming trend we are seeing is that that while tuition has steadily risen, total financial aid has declined from 2012-present as you can see in the chart below. Relying on assistance may not be the ideal plan.
I often receive questions regarding the FAFSA and Expected Family Contribution (EFC). EFC is calculated on both the student and the parent. One interesting change for 2022 is that assets held for the child in a grandparent’s name has no EFC attached to it. Will that be forever? I couldn’t tell you. In this country we change tax codes like I change socks ... so instead of proper planning from year 1 we need to adjust with the code. Here is a great chart that shows the formulas. As you can see, assets held in a 529 owned by the parent are much more efficient as related to EFC than anything in the student’s name.
Here are some other tips and features of 529’s I want to pass along:
- 529’s allow for a 5-year accelerated tax-exempt gift. The current allowable gift rate is $16,000 annually. So your best possible college planning strategy would be to get grandma and grandpa to open a 529 and gift the full $80,000 right after baby has a social security number. College planning solved!
- There can only be 1 owner of a 529 plan so be sure you have a successor owner named on the account in case of an untimely death.
- You cannot have multiple children on one 529 but you do have the ability to change beneficiaries down the line. So if your oldest gets a full ride to play basketball, the 529 can simply be switched to your younger child without tax consequences.
- With the SECURE Act in 2020 came added uses for 529’s. In general, up to $10K annually can be withdrawn with the same tax benefits for tuitions associated with public, private or religious elementary and secondary schools.
- Depending on your state your 529 contribution may be state tax deductible
- Franklin Templeton runs the 529 plan in NJ and has a wonderful crowd-funding platform named Spryng. You can share a personalized link for your child and it’s a great way to receive direct contributions for birthday, religious events, etc.
College planning will continue to be a huge issue in your overall financial picture. Costs do not seem to be slowing down and we still cannot get a clear answer from government on the direction of overall student debt and tuition controls. In the meantime, as with everything we talk about, there is no one size fits all solution. If college planning is a concern let’s have a conversation and figure out what fits best for your plan. Maybe I’ll see you on a college campus this summer!
As always please feel free to share this with someone who might benefit.