When our cute toddlers are finally out of diapers, it feels like we’ve just received a pay raise, doesn’t it? But we soon realize all the other expenses that come with rearing a child are just beginning: dance lessons, sports fees, music lessons, tutoring, and more.
College or post-high school education can seem so far away, but it’s best to get a plan in place now and start saving for their college education. Here’s how.
The Cost of Higher Education
Once your child graduates from high school, so many options are open to them. Choices include two-year college, four-year college, trade school, military, and work. It can be daunting for a 17 year-old to have to choose, but it can be even more daunting for parents to know they will be paying for one of these options. What do the costs look like for the education routes?
● Two-year College. Community colleges provide students a way to earn an Associate Degree, earn certification in certain skilled trades, or complete general education requirements for those transferring to a four-year school. Costs can vary widely depending on whether a student is attending full time or not, living on campus or not, and an in-state resident or not.
● Four-year College. These schools can award Bachelor Degrees, Masters Degrees, and PhDs. Four-year colleges and universities have an even more varied cost structure that depends on whether the school is public or private. For public schools, there is also a price difference for in-state versus out-of-state residents.
Average costs of attendance are:
○ In-state public college: $26,820 per year.
○ Out-of-state public college: $43,280 per year.
○ Private college: $54,880 per year.
● Trade School. Sometimes called vocational schools, this type of education provides hands-on training for a specific skilled trade such as auto mechanics, carpentry, cosmetology, electrical, plumbing, and welding. Many times training can be completed in a year or less. Costs can range anywhere from $1,000 to $30,000 per year or more.
How Much to Save
A good rule of thumb regarding how much to save for your child’s college education: one-third of the cost. Look at the cost of what kind of school your child is most likely to attend and use that as an estimate. A rough breakdown of funding sources can look like:
● One-third from parent income and parent borrowing
● One-third from college fund savings and investments
● One-third from student loans, work-study, grants, scholarships
Decide how much of your child’s education you are willing to fund, then break that figure down into bite-size monthly figures to save. The important thing to remember in saving for your children’s higher education is that something is better than nothing. Depending on what school and how long it takes for them to complete their education, the cost may not be completely covered by the amount you’ve saved.
And that is totally okay.
Any money that you put into a higher education fund will earn interest until the time you need it. By contrast, if you save nothing and wind up borrowing all the money needed for college, you will be paying it back with interest. Big difference.
529 Plan, Education Savings Plan, or UTMA?
You could open a savings account and shuttle money into that every month, but there are smarter and more effective ways to save for your child’s future educational pursuits. Three of the best ways are the 529 Savings Plan, the Education Savings Plan (ESA), and Uniform Transfers to Minors (UTMA).
529 Savings Plan
These plans are specifically designed as savings accounts for educational expenses and are tax-advantaged accounts. While all 529 plans are set up in each state of the union, they are open to anyone regardless of what state they live in. Some details include:
● Contributions and earnings grow tax-free.
● No income or age limits.
● Each state sets their own contribution limits with annual contributions up to $16,000 being exempt from federal gift tax.
● A one time front-loading contribution of $80,000 is allowable and not subject to federal gift tax.
● No taxes upon withdrawal when funds are used for education expenses.
● Low maintenance way to save for college.
What happens if my child doesn’t go to school? You can transfer the plan to another family member for them to use. Or you can decide to cash in the account, although you will have to pay the taxes on it, plus a 10% penalty.
An ESA, or Coverdell Education Savings Account, is a tax-deferred trust account that helps families save for their child’s education. Some specifics include:
● Contributions and earnings grow tax-free.
● The current annual contribution limit is $2,000.
● There are income restrictions. You cannot contribute if you make more than $220,000 per year for married couples and $110,000 for singles.
● Withdrawals are tax-free as long as they are less than the student’s annual adjusted qualified education expenses. If the withdrawals are higher than the education expenses, they are taxed at the student’s tax rate.
● The student must be younger than 18 years old when the account is established and the funds must be used by the time the student is 30 years old. After that, taxes, fees, and penalties apply.
● If your child doesn’t go to school or won’t use it by the age of 30, you can transfer the fund to someone else.
UTMA, or Uniform Transfers to Minors Act, is a law that was enacted to allow minors to receive monetary gifts without the aid of a trustee or guardian. The details of this include:
● Adults can contribute up to $16,000 annually and it is not subject to the federal gift tax.
● Contributions can include not only cash, but also securities, real estate, royalties, patents, and fine art.
● Any earnings are taxed at the tax rate of the minor.
● A custodian or guardian can manage the account until the child is of legal age.
● Because the UTMA account is in the child’s name and social security number, it may affect their eligibility for financial aid or scholarships.
It is not only advisable to save for your child’s future higher educational costs, it is totally possible. The key is having a plan that works for you and your family’s needs and sticking to it.
Written by Matthew Delaney