For most parents and grandparents, planning for college expenses is a key financial objective and
sometimes a significant challenge. College expenses can be one of the largest expenditures
(besides purchasing a home), for most middle-class families. Since student loan debt is a
significant burden, the need to borrow money can be minimized through advanced planning.
There are several options to consider, including:
Pre-paid Plans – Many states have programs to allow payments to be made over time or
as a lump sum payment. A key potential benefit of pre-paid plans is that they tend to act
as a hedge against economic downturns. This allows you to pre-pay tuition and fees at a
state college or university at the current plan prices. Plan details vary from state to state.
For example, some states offer a full or partial tax deduction for contributions to the
state’s plan. Pre-paid plans are generally guaranteed by the state.
529 Savings Plans (“529 Plan”) – This allows you to contribute to a college savings
account through a variety of investment options. These plans have greater flexibility than
a prepaid plan, but do not offer a guarantee. The earnings are tax-free when used for
qualified higher education expenses. 529 Plans are potentially exempt from the claims
of creditors, thus may be a good strategy for asset protection. Also, “left-over” funds
may be used for your next career after retirement studying culinary or whatever interests
Coverdell Education Savings Account (“ESA”)- This is a tax-advantaged account
designed to cover not only college and university expenses, but it can also cover expenses
for education for children in elementary, middle and high school, such as private tuition,
uniforms, books, laptops, etc. Like a 529 Plan, ESA’s allow money to grow tax deferred
and proceeds to be withdrawn tax free for qualified education expenses. However, the
definition of “qualified education expenses” in an ESA includes primary and secondary
school, not just college and university.
Uniform Transfers To Minor Act (“UTMA”) – This is an account that allows someone
to contribute money to for the benefit of a minor child. The account is managed by a
custodian who has complete control over the account and can withdraw funds as long as
they are used for the minor child. When the child reaches majority age (18 or 21), he or
she owns the account and can use the money for non-educational expenses. While this
option is not the most ideal, it can serve as a secondary source of capital for incidental
expenses that otherwise would not be covered under a Pre-Paid, 529 Plan or ESA.
If you have an interest in planning for college expenses for a child or grandchild, it is
important to research the various options available, including the overall impact on your
financial situation. We would be happy to work with you on the various options and the
impact on your overall financial circumstances.