By Clay Zachry, CFP®
U.S. college costs are rising but so are the numbers of students attending colleges and universities. Research shows that there are long-term benefits of obtaining a higher education for the student and society at large including: expanded job opportunities, increased public engagement, a diverse array of cultural enrichment experiences and scientific advances, prolonged national prosperity and sustained personal financial security.¹ With those factors in mind, it’s never too early – or too late – to start building a solid foundation for your child’s college years.
Helping the Dream School Become a Reality
When the fall of their final year in high school arrives, college-bound students dedicate a lot of their time and energy to preparing essays, filling out the Common Application and other standard college admission forms, sending transcripts to the schools they’ve chosen, requesting letters of recommendation from teachers and others, drafting resumes and attending college interviews.²
After completing the journey from application to acceptance, you’ll arrive at the age-old question: “How are we going to pay for this?” Since financial planning is done best on a holistic scale rather than piecemeal, it’s important to examine how college savings factor into your overall finances and outlook. The most common outcome of a fragmented approach we see at Harris Financial Advisors is that parents will overextend themselves in the short-term and compromise their long-term retirement savings goals. Like most things, having an early start can be your biggest advantage when setting aside funds for your child’s education. If you can get a jump on this early – fantastic! If this isn’t a possibility until later, that’s okay too.
Not All College Savings Accounts Are Equal
A number of college savings and finance plans exist, but not all are the same, nor will all be appropriate for you and your family. Choosing the right savings plan will depend on a variety of factors and each has its pros and cons. And good news – several come with potential tax benefits. Here’s a look at the most common options out there:³
• Tax-free 529 plans, used by an estimated 37 percent of parents, are probably the most well-known among established college savings vehicles. Controlled by the account owner for the life of the account, 529s possess high levels of flexibility for account contributors and do not place age restrictions on account beneficiaries. A 529 plan also allows withdrawals for any qualified higher education expense and has a low impact on a student’s additional financial aid eligibility.
• UGMA/UTMA account, used by 22 percent of parents, allows children to assume control of the account by 18 or 21 years of age and offers more limited flexibility in its use. The funds must go toward the child’s benefit although it is not required that they be specifically applied toward college education. A portion of these funds is taxed; UGMA/UTMA plans also have a higher impact on a student’s financial aid eligibility.
• Coverdell Education Savings Accounts (CESA), used by 24 percent of parents, offer tax-free investing and withdrawals at any education level, but place age restrictions on beneficiaries and income limits on account contributors. The CESA also has a low impact on a student’s financial aid eligibility.
Paying for college can seem a complex and daunting process, but given the extensive benefits that higher education provides, parents and guardians of college-bound students shouldn’t be deterred. From short-term plans to long-range ones, you have a range of savings strategies at your disposal and we’ve only scratched the surface here. Selecting the right option will depend on what you envision for your child and your unique financial situation. Keep in mind that there are many roads to success and many resources available along the way. If you’d like to explore your college savings options with a financial advisor, reach out to us and we can help you get started.
1. Teachers College Columbia University. “An Investment That Pays Off for Society” July 14, 2018. https://www.tc.columbia.edu/articles/2018/july/americans-believe-in-higher-education-as-a-public-good-a-new-survey-finds/
2. U.S. News and World Report. “A Complete Guide to the College Application Process” March 18, 2018.
3. JP Morgan. “College Planning Essentials, A Comprehensive Guide to Saving and Planning 2017-2018” https://am.jpmorgan.com/us/en/asset-management/gim/adv/products/college-savings-plan/college-planning-essentials