“Money won’t change you, but time will take you on…” – James Brown

College Planning is probably the topic I get asked about the most, so today we’re going to look at what college planning is, and three of the tools that are available to parents.

WHAT IS COLLEGE PLANNING?

When people ask about college planning, they are most often referring to what is known as a 529 College Savings Account. They are heavily advertised on radio and tv, and each state usually offers them through a partner institution. The advertisement usually sounds like “For as little as 25 dollars a month, you can send your child to college.” (cue sappy music and smiling families.)

It’s important to keep in mind that this is not how the traditional college plan actually works, because it always depends on what you actually save, what you invest, and timing. Now that we’ve gotten that out of the way, let’s look at the most common options used by parents when they look to pay for their child’s college.

529 College Savings Plans

This is probably the most heavily advertised financial tool out there, and it works like this: You open an account, and contribute up to the maximum amount at once, or over time. You then pick how you want to invest the funds, similar to your retirement plan at work. That money grows tax-deferred, and if used for college, no taxes would be paid on the gains.

Pros:

• tax-deferred growth
• tax free if used for college
• possible state tax deduction if using your state’s plan
• usually easy to setup
• if your child decides not to go to college, the account can be easily switched to pay for someone else’s college education

Cons:

• the fees within the funds available can be high, depending on the state
• can be pretty difficult to actually receive the funds when it comes time to actually use it
• you need to pick the investments inside the plan, which can overwhelm some parents
• if the funds are not used for college, a 10% penalty and taxes would be owed on the gain in the account when cashed in
• similar to your 401k, if you don’t put enough away, the account won’t grow large enough to actually pay for college, but maybe you’ll be able to buy a few books??

Prepaid Tuition Plans

If you have the savings, or income to pay for college now, then you can prepay for your child’s college using a prepaid tuition plan or trust. Similar to the savings plan, each state usually offers this through a partner financial institution.’

Pros:

• more predictable, because the risk of paying for college is passed on to the state
• you know exactly how much you need to contribute to “prepay” for college
• you can pay in installments or lump-sum, so there’s flexibility in contributions

Cons:

• you could have grown your account even larger by investing over a period of time in something like the 529 savings account
• if your child doesn’t go to college, some plans may not allow refunds

UTMA/UGMA Accounts

These accounts are basically custodial accounts where a custodian (a parent) can invest and contribute money, gifts, real estate, etc for the benefit of the child. These can be opened with pretty much any financial institution that offers them, but the state originally chosen usually needs to remain the same. The biggest benefit of these accounts is that they can be used for ANYTHING! So you can look at them as a way to pay for college, or contribute to a down payment on the child’s house in the future. The sky’s the limit!

Pros:

• doesn’t need to be used for college
• tax free earnings up to a cap (currently $1,050), and any excess earnings are taxed at the child’s (usually) much lower tax rate
• not limited to the funds usually reserved for the 529 savings plans

Cons:

• the assets in an UTMA/UGMA are usually counted when it comes time to fill out the FAFSA. So this could potentially lower the student aid the would become available to the child
• the owner of the account reverts to the child at their age of majority (usually 21)

Those are probably the three most talked about options for saving for a child’s education. Of course, there are other options available, like saving into a savings/checking account or taking out student loans. Plus, you should look for as much financial aid available each year, because the best money is free money.

Loan planning can be tough, and that’s where Beyond Financial Planning comes in. We take a comprehensive approach to financial planning where we take the time to understand your individual circumstances so that we can assist you in your planning. Start planning smart, and stop being the government’s personal piggy bank.