Like a dark cloud, the thought of properly funding a college education can loom over a family. With costs skyrocketing in recent years, today’s parents are under the gun more than ever to start preparing, and doing so early on. For grandparents who've gotten their own financial house in order, contributing to your grandchildren's college educations can be an enormously rewarding and generous legacy gift.
Have you used the online calculators to see how much money per month should be invested for your grandchild's future college? It can very literally take your breath away.
In the final analysis, there’s simply no better method to prepare than to begin as early as possible, and consistently as possible…just as in funding a retirement plan. Don't despair if hitting the calculated magic numbers seems an impossible task...just take comfort in your decision to take the steps you can take.
Afterall, predicting the future cost of college is not an exact science, despite the insinuation. The calculators simply take the recent annual cost run up of 6-8% and extrapolate forward.
Who's to say college costs won't decline for 5-10 years in there somewhere?!
Want my 2 cents? Here's something that you WON'T hear in the TV news or from from the calculators...the recent run-up is largely due to the echo-boom generation...children of the babyboomers. Lots of kids seeking diplomas. Guess what? Prices go up. And, the largest portion of these echo boomers will have finished college come 2015. So, I predict several years ahead where college cost inflation takes a well needed breather.
It's hard to find guidance and/or an opinion as to what level of investment is required for your loved one with so many variables in play. So here again is 'one guys perspective'...
If the parents can take action to invest $150-300 monthly with a newborn...they'll likely be well ahead of the curve. Even at this rate and starting this early, the savings are likely NOT to be enough for college in total, but should provide them some very decent options.
Plus, additional investments from grandparents, friends, relatives along the way can provide significant boost too. And who knows...from financial aid, grants, academic and sports scholarships...there are a number of additional x-factors that can come into play later on.
Despite the seemingly unjustifiable cost, a college degree should be considered an attractive investment. A 2007 College Board Study showed that people with a bachelor’s degree earn over 60% MORE than those with only a high school diploma. This gap translates over a lifetime into a whopping $800,000 income difference.
Your grandkids are considering colleges with tuition fees less than $800,000 in today's dollars….right?! Whew….good, glad to hear that.
In short, today’s sacrifices to see a child’s college potential come to reality will be more than re-paid over time. In fact, an additional $800 grand will put the child in the position to finance future generations towards their own success….another example of a legacy theme that pays forward long into the future.
If you’ve amassed enough wealth to live comfortably through retirement with money to spare, perhaps setting up your grandchildren’s college funds is a key element to your legacy. But what are the best options to avoid tax implications and retain control?
A graduation ceremony is an event where the commencement speaker tells thousands of students dressed in identical caps and gowns that 'individuality' is the key to success.
--Robert Purvis
Gifting for College
The simplest is pretty straightforward. Currently, you can offer up to a $13,000 gift to each grandchild tax free each year. In fact, your spouse can add an additional $13,000 for $26,000 total per grandchild potentially.
Your grandchild may choose to have a heck of a time in Vegas with the funds, so the obvious drawback is...control.
Foot the Bill
Another method is to simply send a check to the college or educational institution where you grandchild is enrolled. This way, you are in control of the money and are assured of where it is being spent. In addition, the $13,000 Gift tax exclusion doesn’t even apply. Meaning that if you are blessed with the wealth to provide this additional support…you can gift $13,000 tax free as well as footing the bill for their college education.
(Oh, and by the way, would you please adopt me?)
As long as you are paying directly for tuition (room, board, and other expenses excluded)…you can spend any amount you want on your grandchild…and avoid gift taxes.
Another upside is that your tuition payments will have little to no impact on any financial aid received by the student. This plan works great if you find yourself in the position to fund the education, and the need to pay is now! (ie. your grandchild is already enrolledin college).
If A equals success, then the formula is: A = X + Y + Z, X is work. Y is play. Z is keep your mouth shut.
--Albert Einstein
Custodial Accounts
As an alternative to establishing a full blown trust for a child, one can set up a custodial account. A custodial account is when someone other than the beneficiary essentially controls the money and makes decisions on behalf of them.
In the Uniform Gifts to Minors Act (UGMA established in the 50's), and later the Uniform Transfers to Minors Act (UGTA initiated in the 80's)...the law established a few custodial account vehicles that many have used successfully towards saving for college while reducing tax burdens. Typically, you would identify the termination point for the account such as an appropriate age for which you want the funds released to your beneficiary.
At that time of account termination, your beneficiary receives the funds and may choose to use them in any fashion they like.
While these older investment vehicles are still being used today for certain scenarios, the newer 529 plan option has significant advantages built in that will likely appeal to most people today.
Coverdell ESA Account
A Coverdell Education Savings Account deserves at least some research to understand your full range of options. However, a large majority of folks have already shifted towards the more popular (and with good reason) 529 account in the next section.
One key issue with the Coverdell option is that it is due to phase out by the end of 2010...and it's not clear that Congress will re-institute it. And, according to several reports, even if Congress does resurrect the Coverdell ESA option, it's believed to be scaled back dramatically.
Previously, a key benefit of the Coverdell ESA was that you could utilize the funds for essentially any schooling option, not just "higher" education (College). A Coverdell could in fact be used for educational costs K-12, though limited to a $2,000 yearly maximum. If continued, I've read this benefit may drop to $500...and that the K-12 flexibility might be stripped away in any regard.
Again, you may want to educate yourself on the full range of options. But, as of 2010...it's looking like the 529 Savings Account plan offers the greatest flexibility and advantages...
529 College Savings Plan
Most currently, the 529 College savings plans have come in to favor.
Each and every State sponsors a 529 College Savings Plan. To get plan specifics, just google "529" and "your State name" to get details. (Or click one of the links I'll provide below.) Often you can initiate a plan either directly with the State, with a broker, and quite possibly with the local bank you already use.
While all State 529 plans are exempt from Federal income tax, you should purchase from your State of residence to be sure to avoid State related taxes should you purchase one in another State.
This does NOT mean however, that your grandchild must attend a University in your State of residence. He or she is free to attend school anywhere and use the funds tax free.
Alternatively, there are pre-paid in-State plans as well if you KNOW your grandchild will attend the State school. The upside to this is you lock in a tuition rate that is likely to be lower than it will be in the future. But generally, the standard 529 plan gives you the greatest flexibility for future decisions on schooling.
No tax going in, no tax coming out. Think of a 529 as essentially the same concept as a 401k or IRA plan (tax free investments) except that instead of using the funds for retirement, they are dedicated to a higher education.
And unlike the big drawback of the UGMA/UTMA options, with a 529 plan, YOU are in control of where the money goes and when. Secondly, a 529 plan won’t harm your grandchild’s chances to receive financial aid, since, technically, the money is in an account where you are the custodial owner.
Score two points! (But wait, there's more...)
While the Coverdell ESA limits you to $2,000 maximum annual contribution, the 529 has a max that ranges from $100,000 to $350,000 depending on the State. Regardless of your personal income, you are allowed to contribute, while the Coverdell has income limit restrictions. Another upside to the 529 is that your can deploy the funds for your benefactor at the time of your choosing, and the child can be any age. The Coverdell forces you to stop contributing when the child turns 18, and all funds must be released before their 30th birthday.
And, if the grandchild you allotted the funds for in the 529 eventually doesn’t use them all, or goes a different path altogether…you can easily re-dedicatethe funds for a different grandchild’s education.
(Ding. Ding. Ding....by knockout, the new heavyweight champion...529!)
Can you tell which option I'd recommend?
Again, I am not a financial expert nor should I be considered as formally advising you in this regard. Be sure to do your own homework and I'm sure you'll come to a very similar conclusion.
Worst case scenario….NONE of your grandchildren end up utilizing your generous allotment of funds into their respective 529 accounts? Or you come to find that you've invested too much money? You can still use the funds personally at an accredited university of your choice.
Golf Academy?
Cooking Academy?
Museum Curator Academy?
Yes…YOU can re-deploy the funds toward your own (or someone elses') higher education purposes. A financial advisor relayed to me that this happens frequently! So if by chance you end up over-investing in the 529, you get the sweet reward of going back to school…this time with no Calculus and no early Friday morning labs required!
Note: At the time of this writing, it's noted that the tax exemption for 529s is due to sunset (phase out) in 2011. However, unlike the concern with the Coverdell ESA, there's a strong confidence among financial professionals that Congress will extend the popular 529 option for the forseeable future. Still...it's wise to stay tuned to validate this come 2011.
Books on College Savings
The best way to face the fears and anxieties of saving for college is in doing some research. Enlightening the shadows of the unknown will not only make you feel better...but you're going to find that the education here pays off in spades!
Education is a progressive discovery of our own ignorance.
