EDUCATION FUNDING

THE education funding component

The education funding component of a financial plan:

• Begins with identifying what your education funding goals are, estimating the costs of those goals and assessing the feasibility of meeting those goals.
• Involves establishing a savings strategy which includes determining how much to save and where to save those funds. Options may include:
  • Non-retirement investment account – While there are no tax advantages to setting aside funds in this type of account, savings in a non-retirement account can be used for any purpose, education or otherwise, thereby providing ultimate flexibility.
  • 529 Savings Plans – These tax advantaged savings plans are specifically designed for education expenses. Contributions grow tax-free, and withdrawals for qualified educational expenses are also tax-free.  Some states offer additional tax incentives for contributions made to these plans.
  • 529 Prepaid Plan – A type of 529 plan that allows families to lock in current tuition rates for future attendance at in-state public universities. These plans can provide a hedge against rising education costs.
  • Coverdell Education Savings Accounts (ESA) –These accounts offer tax-free investment growth and tax-free withdrawals when the funds are spent on qualified education expenses, which can include education expenses for kindergarten through twelfth grade. Contributions to ESAs are not tax-deductible.
  • Custodial Accounts – Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts allow parents or guardians to set aside money for minors that can be used for any purpose, including education. However, once the child reaches a certain age (usually 18 or 21), the child gains control of the account.
• Requires that careful attention be paid to how accounts set aside for college are titled – in the parents’ name or the in the child’s name – as this decision can impact financial aid options.
• Establishes an investment strategy for the funds that are set aside for education expenses. This may be different than how other investment assets are managed given that time horizons of goals may vary.

For grandparents, education funding for grandchildren and great-grandchildren can be incorporated into an overall estate plan.  Irrevocable trusts can be established to allow for large upfront gifts that reduce the size of one’s estate, while still dictating that the funds within the Trust be used for educational pursuits.  The annual gift exclusion can also be used to make tax-free monetary gifts to children or grandchildren and these funds can be directed towards education savings accounts.  Additionally, grandparents can pay tuition directly to education institutions for their grandchildren and those payments do not count against their annual gift limits or their lifetime gifting exclusion.

When it comes to education funding, oftentimes, trade-offs are necessary, and it is important to understand the implications of your decisions; for example, do you save for college in lieu of saving for retirement?   Are you better off funding college upfront or encouraging your child to take out loans that you help to pay back?

This will help ensure that your education funding goals align with your other financial objectives, including retirement and estate planning, and allow you to position yourself in a way that increases the likelihood that your desires will be achieved.