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Education: Planning for Your Children's Future

February 02, 2024

It's been a big week at our house--both my son and my stepson have been accepted to their first choice colleges!

We've been working on their FAFSAs and looking at admission packages, and talking about loans and scholarships.

Next year, four of our five kids will be pursuing higher education.  Wow.

As a parent and a financial advisor, I know firsthand how paying for your child's college education can be stressful. Funding education can seem daunting, especially with ever-increasing costs. Then there's the question of whether or not you want your child to bear some of the responsibilities of paying for their schooling. I wrote about this in a previous post from which I received great feedback, which you can read here. But many are still interested in saving for school, whether private school for early grades and high school or college. If you're interested in learning how to save for your child's education, I wrote this post for you.

There are some key options and strategies for saving for your child's education, focusing on 529 plans and other effective savings vehicles. I aim to help you understand and navigate these options to secure your children's educational prospects.  Education costs have steadily risen, making early financial planning more crucial than ever. The expenses can add up significantly if you're looking at public or private schools or undergraduate or graduate studies. This isn't just about tuition; it includes books, supplies, accommodation, and other living expenses. The key is to start planning as early as possible. The sooner you begin, the more manageable these costs become, giving your child the freedom to choose their educational path without being overly burdened by financial constraints.

Exploring 529 Plans

One of the most popular and effective ways to save for education is through a 529 plan. These tax-advantaged savings plans are designed specifically for education costs. Contributions to a 529 plan are tax-free, and withdrawals are not taxed for certain education expenses. There are two main types of 529 accounts: savings plans, which function like investment accounts, and prepaid tuition plans that allow you to prepay part or all of the costs of an in-state public college.  Each state offers its own 529 plan, and while you're not limited to your own state's plan, some states offer tax benefits or other incentives to invest in their plan. Researching and comparing different 529 plans to find one that best aligns with your financial goals and your child's educational needs is essential.  It's important to understand that the balance in a 529 Plan is considered in calculating your child's expected family contribution--decreasing their eligibility amount for financial aid.  The Secure 2.0 Act passed in 2022 added an option for families to transfer unused 529 funds to a Roth IRA owned by the beneficiary of the 529 plan.  This allows families to avoid paying a penalty to access unused funds for non-educational purposes, but only when the funds are transferred to a Roth IRA for the child.  

Additionally, there are other vehicles for saving for your child's education. Each comes with its own set of benefits and considerations:

UGMA/UTMA Custodial Accounts: These accounts allow parents to save money in their child's name. The first advantage is that a portion of the earnings is taxed at the child's tax rate, usually lower. However, these funds are considered the child's assets and can impact financial aid eligibility.

Coverdell Education Savings Accounts (ESAs): These accounts offer tax-free earnings and withdrawals for qualified education expenses. Unlike 529 plans, they can also be used for K-12 expenses. These do have lower contribution limits and income restrictions.

Savings Bonds: U.S. Savings Bonds can be a safe investment option, and the interest may be tax-free when used for education. Savings bonds, however, offer lower returns compared to other investment options.

Each option has unique features and should be considered based on your financial situation.  Depending on your liquidity and retirement savings situation post-divorce, considering financial aid as a viable option is sometimes optimal for you as well as for your child.  Jeopardizing your abilty to save for your own financial independence later in life by saving for your child's college instead may cause a problem that affects both of you later.  I can help you assess your options and help you make the best savings decision for the long-term.  Schedule a consult with me here.

Strategies for Effective Saving

Saving for your child's education is a long-term commitment. Here are some strategies to help you effectively save:

· Start Early and Save Regularly: The power of compounding interest means that even small amounts saved regularly can add up over time.

· Set a Goal: Estimate the future cost of your child's education and set a saving goal. This gives you a clear target to work towards.

· Budget Wisely: Incorporate education savings into your regular budget. Treat it like a non-negotiable expense.

· Invest Wisely: Depending on your time frame and risk tolerance, consider diversifying your investments to maximize growth potential.

Remember, the key is consistency. Regular contributions can significantly impact your savings over time, even in small amounts.

Whether you decide to pay for your child's education or to give financial responsibility to them, I hope this post shows you some tips on how anyone, even your child, can make a savings plan. With the rising cost of education, it's vital to start saving early and explore all available options. Whether you opt for a 529 plan, a custodial account, or another savings vehicle, the most important step is to begin. As a financial advisor, I encourage you to consider these options and strategies carefully and seek professional advice tailored to your unique situation.

1) Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. 2) Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.