by Travis Venable, CMP™

For many, saving for college isn’t a walk in the park. Yet we constantly hear how earning a college degree is more important than ever. Studies show that those with college degrees earn 74% more than high school graduates, experience higher job satisfaction, and lower unemployment.₁ Even more, nine out of 10 parents believe their kids will pursue higher education,₂ but with rising college costs, financially preparing for this expense can feel like an impossible task.

So, what options are available? How do we afford to save for college?

Below are a few popular methods to save for your children’s education and ideas on how to get there:

529 Savings Plans

529s are designed for higher education investing, and your investment’s earnings and any withdrawals for qualified expenses like tuition, room & board, even computers, are tax-free. They offer flexibility for in-state and out-of-state colleges, and may even be offered by your employer. Here are a few of the highlights:

1. There are no income limit caps for contributions and anyone can contribute, even grandma and grandpa.
2. The owner of the account maintains control of the assets throughout, decides when withdrawals will be made, and can elect to change the beneficiary if necessary.
3. You can contribute up to $500,000 per beneficiary.
4. Provides tax benefits by allowing you to contribute up to $14,000 ($28,000 for married couples) annually without gift-tax consequences. Under a special election, you can invest up to $70,000 ($140,000 for married couples) at one time by accelerating five years' worth of investments.

Coverdell Education Savings Account

Coverdell ESAs can be used for qualified education expenses such as tuition, books, computers, and room and board. These investment accounts function similar to 529’s in that earnings and qualified withdrawals are tax-free. One major difference from 529s however, is the ability to make qualified withdrawals for both K-12 and higher education. Coverdell ESAs offer greater withdrawal flexibility for families looking to use funds for K-12 and beyond. Here are few key characteristics:

1. The account owner can change the investments at anytime.
2. The beneficiary may assume control at age of majority (18 or 21 in most states).
3. Contribution limit is $2,000 per year per beneficiary.
4. Ability to contribute is phased out for married couples with incomes between $190,000 and $220,000, and for individuals with incomes between $95,000 and $110,000.

UGMA/UTMA

Named for the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), these custodial accounts let investors take advantage of the lower tax rate for children while still saving for education. However, these accounts aren’t limited to education expenses and can be used for anything that benefits the child, penalty free. Here are a few account features:

1. You are unable to change the beneficiary of these accounts.
2. The child assumes control at age of majority (18 or 21 in most states).
3. Earnings in the account under $2,100 may be taxed at the child’s rate; earnings above $2,100 are taxed at the parents’ rate.
4. There are no income or contribution limits other than adhering to the annual gift tax exclusion mentioned above of $14,000 ($28,000 for married couples).

Taxable Investment Account

These accounts can be set up either individually or jointly for various reasons, including saving for college. Because these accounts have virtually no restrictions on withdrawals, the account owner(s) can elect to use the funds for any educational expense and for a child of any age. Here are a few key elements:

1. There are no income limitations and no maximum limit on contributions to the account.
2. Account earnings and capital gains are taxable at the owner(s) applicable rate.
3. Account owner maintains control of the account and any withdrawals regardless of the child’s age.
4. Ability to change investments when needed, but tax implications apply.

How do I get there?

So now we know a few of the options available for saving, but how do we save? Or better yet, how can I afford to save?

Hey…I get it! This is probably the last thing you are thinking about right now. Whether expecting, caring for a newborn, or have a child already attending school, there are countless other things that demand your attention and financial resources. However, I often ask my clients to consider rephrasing the question above by asking, “How can I afford not to save?”

In 2011, a year at a public university cost more than $20,000.₃ By the time today’s newborns enroll in college, four years at a public university is estimated to cost more than $200,000. Starting a savings plan can make a meaningful impact by potentially reducing the amount your child will need to borrow to pay for school. So consider these funding options:

1. Set-up monthly automatic contributions. Many of the methods above, as well as others not mentioned, allow for monthly contributions. Within your budget, you can put the money away for education and essentially forget about it until needed.
2. Allow a relative to gift a contribution: It is not uncommon for a relative to volunteer a gift for a child’s education. Depending on the account and the amount of the gift, these can be made monthly or in a lump-sum.

The above mentioned are just a couple methods available to parents thinking about saving for college. Understanding that every situation is unique, it’s important to speak with a financial professional to determine the right strategy for you and your family and discuss how that decision may impact financial aid eligibility going forward.

1 Bureau of Labor Statistics, Earnings and unemployment rates by educational attainment (2014)
2 Source: Sallie Mae, How America Saves for College (2010)
3 Current annual college cost figures are obtained from Peterson’s. The college costs may include tuition, room and board, and books and expenses as reported by Peterson’s. Copyright© 2016 Peterson’s, a Nelnet Company, and its licenses. All rights reserved.

---

About the Author

Travis Venable, CMP™, is a financial advisor with Seattle-based Tallus Capital Management. He provides a holistic approach to financial planning and has a passion for helping families plan for and navigate college expenses. Travis proudly serves as a volunteer speaker for PEPS groups and hopes to continue for years to come.

Securities offered through LPL Financial, Member FINRA/SIPC. Financial Planning and Investment advice offered through Financial Advocates Investment Management, DBA Tallus Capital Management, a registered investment advisor and separate entity from LPL Financial.