The average college education expense is $35,720 per year. Over four years, that works out to be over $142,000, assuming your child graduates on time! (sorry Mom) If you include interest on the student loans, opportunity costs, and other hidden costs associated with your child’s college education, then the amount balloon’s to over $400,000 for a bachelor’s degree, alone!
The cost of college has tripled over the last 20 years, giving it an annual growth rate of 6.8%. If this trend continues, your child’s college education expenses will be even higher in the future!
Massive amounts of student loan debt and their large monthly payments continue to cripple student’s ability to save money and build wealth. Without savings and the means to build a cash runway, they’ll be stuck in a financial situation that handcuffs them to a job for years or even decades to come!
But, this doesn’t have to be your kid’s future. It can all be different. As a parent, you have the power to change their financial future by creating a plan to save and pay for their college education expenses far in advance!
The money inside a Coverdell Education Savings Account (aka Education IRA) can be used to pay for your child’s education costs. It covers qualified expenses from kindergarten through college graduation!
Coverdell ESAs have a similar tax treatment as Roth IRAs, too. The contributions are made using post-tax money which grows and gets withdrawn tax-free, as long as the funds get spent on qualifying expenses.
If you’re married, file jointly, and your income is below $190k, then you can contribute a maximum of $2,000 per child per year to a Coverdella ESA. Otherwise, as your annual income approaches $220k, your contributions phase out.
It’s also important to note that there are special rules for a Coverdell ESA once your child turns 30. If there’s still money left inside it, then you’ll get to choose whether the balance goes to your child, gets transferred to another family member, or you’ll withdraw it. By selecting the last option, you’ll be required to pay taxes plus a 10% penalty.
While Coverdells have low contribution limits, many people use them because they offer a wide range of investment options. More so than you’ll typically find in a 529 plan.
Like a Coverdell ESA, a 529 Plan allows you to save for your child’s college education using post-tax earnings. These funds grow and also get withdrawn tax-free, assuming they’re used on qualified education expenses.
Both 529 Plans and Coverdell ESAs typically list your child as the beneficiary, not the account owner. This means that your child has no control over the withdrawals or how the funds get used, which ensures it’s spent on your child’s college education and not a sports car or other status symbol!
One distinction between 529 Plans and Coverdell ESAs is their withdrawal limits. The maximum you can take out of a 529 Plan to pay for elementary, high school, and apprentice programs get capped at $10k per year.
Unlike Coverdell ESAs, 529 Plans have no income restrictions. You can contribute up to $15k as an individual or $30k as a couple per year – both of which qualify for the annual gift tax exclusion, too!
If you’re behind on saving for your child’s college education, then a 529 Plan may be able to help you catch up. The tax code allows individuals to contribute $75k per year (or $150k as a couple) as a special gift provided that no additional gifts will be made in the next 5 years. Keep in mind that this is a unique circumstance that comes with specific terms and conditions.
Another benefit of 529 Plans is that some states offer tax breaks and incentives for using them. Before contributing to them, be sure to review the benefits in your state.
The Uniformed Gift to Minors Act (UGMA) and Uniformed Transfers to Minors Act (UTMA) are two more ways to save for your child’s college education expense. They allow you to transfer a portion of your assets to your minor children without needing to establish a trust. However, the transfer gets treated as an irrevocable gift and is placed into a custodial account.
Since UGMA and UTMA accounts are custodial accounts, they’re held in your child’s name but still allow you to have control over them. That is until your child reaches your state’s age of majority, at which point they’ll take full control over the account and be able to spend the money however they like!
As an individual, you can contribute up to $15k annually, or $30k as a couple. Your contributions are made post-tax and the financial gains inside these accounts have limited tax breaks. The first $1,050 in unearned income is tax-free, the next $1,050 gets taxed at your child’s tax rate, and anything above $2,100 gets taxed at your rate.
While the tax benefits of UGMA and UTMA accounts aren’t as good as Coverdells or 529 Plans, they still do have their advantages. They allow you to invest in both traditional and alternative assets. In addition, the money inside them has no restrictions and can be spent on anything!
Many people use these accounts in combination with others to pay for their child’s college education. They may use a 529 plan to cover qualified college expenses and a UGMA or UTMA to cover the non-qualified ones, like transportation, insurance, and healthcare costs.
Another important point to consider is that these accounts may impact your student’s ability to receive Federal Student Aid. For application purposes, these college savings accounts are considered your child’s asset, not yours. So depending on your financial position, a brokerage account may be a better option for you.
Contributions to general investment accounts (aka brokerage accounts) are made using after-tax dollars. They don’t have any income limitations or tax advantages, meaning you’ll pay taxes each time you realize a financial gain.
To limit your tax liability, consider investing for the long term by buying index and college target-date funds. They can help you avoid paying unnecessary capital gains taxes and most of them have ultra-low total expense ratios!
Typically, general investment accounts should be held in your name. This not only allows you to call the shots but also has a smaller impact on your child’s ability to qualify for financial aid.
General investment accounts can also be a good option if your child decides higher education isn’t right for them. Instead of paying for college, these funds could get used on a mentorship program, to start a business, or kick-starting their retirement nest egg!
It’s no secret that real estate can be a smart investment. But, did you ever think it could pay for your child’s college education expenses, too?
There are many advantages to owning rental property. When it’s bought correctly, it provides you with positive cash flow, tax benefits, and equity!
Over time, equity gets created from the loan balance getting paid down and the property’s value rising. As the equity grows, you may be able to do a cash-out refinance and pay for your child’s college education tax-free!
While this is an unconventional approach, it works for those who have the financial discipline to use the money for its intended purpose. Before buying a property, you’ll need to learn the ins and outs of owning and managing residential real estate.
It may not be possible for everyone to save and completely pay for their child’s education expenses. Luckily, there are ways for you and your student to find free money!
To start looking, fill out the Free Application for Federal Student Aid. In doing so, you’ll receive back many different options to pay for college, many of which don’t even require you to pay the funds back!
The application for Federal Student Aid should get filled out each year your child is in college, too. It will give a current list of Federal Grants, work-study programs, and school aid that your student qualifies for. As a last resort, it also provides information on student loans.
A few places where you can search for scholarships and grants are:
Keep in mind that each school has a deadline to apply for Federal Student Aid. To make sure you don’t miss out, add the appropriate dates to your money calendar.
Paying for your child’s college education can be very expensive. Still, there are some ways you can cut down on costs.
For starters, public colleges cost less than private ones. Also, schools that are in-state or close by are often less expensive. Some states even offer lower tuition costs to those who live within their region or that share its border.
Colleges and universities that focus on teaching, instead of research, are often more affordable. In addition, students who start at a community college and transfer to a 4-year school later, are also able to save money on their education expenses.
For some students, it makes sense for them to go to a technical school or to work and go to college part-time. Not only can this help them decide what they truly want to do, but they may also be able to find an employer to pay for part of their tuition expenses!
Let’s face it, college isn’t for everyone. Depending on your child’s interests and expected post-graduate income, it may not make financial sense for them to attend, either.
For example, if your child’s expected income after graduating is a tiny fraction of the amount it will cost for them to go, then it may not be worth it. As a parent, you may need to have some difficult conversations with them about how this one decision can impact their financial future and life for years to come. Not to mention, the effect it could have on your ability to retire happy, either.
Today, there are many alternatives to college and a few of those programs are:
Saving and paying for your child’s college education expenses can be challenging, but it doesn’t have to be. The sooner you and your child decide which options are best, the sooner you can start saving and investing to meet them.
In the years that follow, the power of compounding begins to work harder, so that you don’t have to. Instead, you’ll have more time with your child before they leave the nest!
How are you planning to pay for your child’s college education expenses? Comment below.
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Great tips, Todd!!!
Thank you, hope they help!