Know which paths to take to navigate rising college costs
Published college costs can be intimidating, even to dedicated savers. Harvey Mudd College heads the total cost list at $69,717, while Columbia University charges the most for tuition alone: $55,161. Few students pay these totals. Scholarships and financial aid can cover some expenses, and state universities and colleges cost much less. Nevertheless, 61% of undergraduates leave school with debt – an average of $28,100.
You might expect parents and grandparents would be saving large amounts in tax-advantaged college savings programs. However, Sallie Mae, the nation’s largest college student loan company, found that although 57% of parents are saving to fund a college education, only 37% do so in a tax-advantaged way.
If you intend to help pave someone’s path to higher learning, you have several choices.
Section 529 college savings plan
Generous contribution limits and potential for tax-free qualified withdrawals make a 529 plan the choice for many families. A benefactor can gift up to five years of gift tax exclusions for a $70,000 one-time contribution ($140,000 for a joint contribution). States also may offer tax breaks on plan contributions.
Coverdell education savings account
This tax-advantaged account’s main drawback is its modest contribution limit – $2,000 per year. If your modified adjusted gross income is less than $110,000, you can use contributions to cover qualified higher education expenses or even elementary and secondary education expenses, a key difference from other education accounts. Contributions grow tax-free and qualified withdrawals are free of tax at the federal level and often at the state level. Any funds left in a Coverdell ESA must be distributed to the beneficiary when he or she reaches age 30, unless that person has special needs.
UGMA/UTMA
You also can make a contribution under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act. The “gift to the minor” is irrevocable, and the assets become the property of the child once he or she reaches the age of majority (usually 18 or 21). Also, the child’s assets could work against financial aid calculations.
Outside the box
Other savings avenues are possible. If you qualify, you could open a Roth IRA (2017 contribution limit: $5,500; $6,500 if you’re 50 or older) with the idea of using some of your contributions (not your gains). You can extract your after-tax contributions at any time, for any purpose, while leaving your gains to grow tax-free to support your retirement. Or consider tax-efficient investments; your withdrawals won’t be tax-free, but they can be used for any purpose without any penalties to consider.
Next steps:
- Consider what you can afford to help a loved one secure a higher education.
- Evaluate available education funding vehicles.
- Coordinate with your planning professionals.