Don’t Get a D in Debt Management: Debt-Smart College Planning for Parents
The time has finally arrived: your child is preparing for college and getting ready to take that next big life step. It is an exciting time, but for many parents, the financial responsibility and impact on their wallets can be crippling. According to a CNBC report, over the past 20 years, tuition and fees have more than doubled. For in-state public colleges, today, parents and students are looking at nearly $11,000 annually and almost $40,000 annually for private colleges.
Here are a few suggestions to try and avoid the full weight of debt that often accompanies higher education:
Contribute a percentage of every paycheck into a college fund
One of the more beneficial ways to prepare for your children’s college expenses is to start early and contribute a percentage of each paycheck into an account. There are a variety of different strategies you can take to do this, including:
·529 Plan
A 529 plan is a tax-advantaged savings plan meant to encourage getting into the habit of saving for future education costs. This means your contributions can grow tax-free, and withdrawals for qualified education expenses are also federally tax-free. There are two types of 529, or “qualified tuition plans,” as they are officially known.
- Education savings plans—Most are available to everyone, but a few require residency for the saver and/or beneficiary.
- Prepaid tuition plans—These plans typically have residency requirements. However, there are exceptions that you may wish to discuss with your financial professional.
·Coverdell Education Savings Account (ESA)
A trust or custodial education savings account is set up solely to pay qualified education expenses for the account's designated beneficiary. When the account is created, the designated beneficiary must be under the age of 18 or a special needs beneficiary. Coverdell ESAs have an annual contribution limit of $2,000 per beneficiary and contributions are not tax deductible.
·Uniform Transfers to Minors Act (UTMA)/ Uniform Gifts to Minors Act (UGMA)
A taxable investment account with no contribution limits and no minimum to open the account, where you contribute or transfer cash and financial instruments such as mutual funds, stocks, bonds exchange-traded funds, certificates of deposits, and more (both UTMA and UGMA). However, with an UTMA, you can also include physical property such as real estate, jewelry, and vehicles. A portion (up to $1,250 in 2024) of any earnings from a custodial account may be exempt from federal income tax, and a portion (up to $1,250 in 2024) of any earnings in excess of the exempt amount may be taxed at the child’s tax rate. Anyone can contribute to a custodial account, including parents, grandparents, friends, or other family members. There are no contribution limits, and individuals can contribute up to $18,000 ($36,000 for a married couple) free of gift tax. UTMA and UGMA accounts are not transferable to another beneficiary and contributions are considered an irrevocable gift.
Consider community college and transferring credits to a four-year school
Community college is far less expensive than an in-state public four-year college. It requires some research and phone calls to the school, however, you may learn that quite a few credits will transfer from community college to a four-year school. Most schools require students to take core classes to be eligible for graduation and taking them at a 2-year community college may potentially save you thousands of dollars. According to NCHE, the average tuition and fees for a public two-year college for the 2023-24 school year is about $3,990.
Encourage your child to apply for scholarships
It is no secret that students who make an effort in high school and do well are rewarded with potentially lucrative scholarships. These scholarships may help to take a huge burden off you and your family. They are essentially free money for college that isn’t required to be paid back.
Create a college budget
Budgeting is a common method for gaining control of your finances. With a budget, making informed decisions is easier and can also help mitigate some of the financial risks and unforeseen obstacles that might arise. Some of the costs may include:
- Tuition, books, and housing.
- Supplementing your child’s day-to-day expenses as they will most likely only be able to work part-time.
- Managing rising inflation and cost of living
Consult a Financial Professional
Life, in general, is expensive, and working families often find it challenging to manage their expenses every month. As our children grow older, the reality of the significant expense of college can cause stress and concern. Savingforcollege.com estimates that most families are only able to save about 10%, if that, for their children’s college expenses. Consider consulting a financial professional to learn which steps you can take to mitigate falling short of your college savings goals.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Sources:
UGMA & UTMA accounts | Tips for custodial accounts | Fidelity
SEC.gov | Updated Investor Bulletin: An Introduction to 529 Plans
Topic no. 310, Coverdell education savings accounts | Internal Revenue Service (irs.gov)
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