New Kids on the Block; Reunion Tour
As promised, the band is back! One last blog focused on the numerous ways to save for your child’s future, a few that I will highlight are:
- UGMA/UTMA – Custodial Accounts
- Financial Aid for College
- Tax advantaged plans
- Prepaid tuition
UGMA/UTMA or Custodial Accounts are considered assets of the child and can be used for any purpose. An UTMA may include real estate, stocks, mutual funds, or bonds. UGMA only includes stocks, mutual funds and bonds, no real estate. This could be a way to save for the first car, spring break or summer trips, and other large expenses. You could use it to pay for education but there are more efficient ways to do so. Once the child reaches 18 or 21, depending on the state, he or she gains full control. Please note, your child might not spend the funds how you see fit, so use caution with this type of account. Many people will opt to create a trust or leave the investments in their own name instead of using a UGMA or UTMA.
I could write an entire blog on financial aid but will keep it very high level. All students should complete the Free Application for Federal Student Aid (FAFSA). This begins the financial aid process and should be completed in October of the student’s senior year. Information from the FAFSA is sent to colleges of the student’s choice and is used to determine what type of federal financial aid a student qualifies for.
If financial aid isn’t available a student can apply for scholarships or take high school or junior college classes that count towards college credits. The remaining amount needed for college expenses can be paid using a few different strategies.
The most common tax advantaged plans are 529 plans and Coverdell ESA accounts.
A 529 plan is typically for parents and grandparents to contribute but anyone can. It can be invested in a variety of ways but generally entails a diversified portfolio based on your child’s age. Any appreciation in the asset value is tax free if used for qualified education expenses. Another advantageous feature of a 529 is that it is owned by someone other than the child, which means the owner can ensure the funds are used wisely.
Coverdell Education Savings Account (ESA) also grow tax free if used for education and anyone can contribute, but contributions cannot exceed $2,000 per year. There are also phase out limits for a married couple making over $190k or single taxpayers making over $95k.
Prepaid tuition is paying for credits for tuition today and using them when your child goes to college. The advantage is locking in today’s cost. There are a few disadvantages. The credits only cover tuition, not room and board. You essentially earn a return equal to inflation. Your child might receive a scholarship and not use the credits, and if so, you only receive back principal that is not adjusted for inflation. Only a few states still have prepaid tuition plans, not Alabama, and those states might offer an undesirable curriculum which may limit the student’s choices. By purchasing credits, you are relying on the state to invest your funds wisely. It is imperative that you find out how solvent the prepaid tuition plan is before purchasing credits.
No matter which strategy you choose, parents should not compromise or delay retirement in pursuit of paying for a child’s education.