When you are caught-up in the day-to-day hustle of getting by it can be easy to forget that tomorrow is right around the corner. This can be equally true about saving for children’s college educations. Yet these things can have a way of creeping up on us, often much quicker than we expected. One day we wake up and find ourselves with one, two or more children in college.
Surprisingly, the “average” cost of a four-year public school is now almost $20,000 per year, and that figure is rising, with college costs reportedly outpacing inflation by 5-6% per year. And with the difficulty for college students to find work, or the pressure to take non-paying internships for experience, parents as well as students are deeply concerned about how to pay for higher education.
The answer will naturally be different for each family, and may involve extended families such as grandparents or step-families. In some cases, the parent’s may incorporate college planning with estate planning, to ensure that their children can attend college if something happens to one or both parents.
One tool that being utilized, that can accomplish both help for higher education as well as estate planning is a college savings plan commonly known as a 529 plan (named after the Internal Revenue Code section that creates them). Contributions to 529 plans are generally not subject to gift, estate or GST tax, gains should not be subject to income tax if used for qualified higher education expenses (QHEEs), and these assets are not owned by the student for financial aid purposes, making them an excellent tool for saving for college.
Furthermore, it may be possible to “front-load” a 529 plan by contributing five years’ worth of gift tax annual exclusions (currently $14,000 per year) free of gift and estate tax as long as the contributor meets the survivorship requirement.
While there are certainly attractive upsides to a 529 plan, there are also some downsides as well. The gains in a 529 plan can be subject to tax if not used for QHEEs. The investment options may also be limited. In Arizona the options currently include either FDIC insured CD’s and mutual funds. There may also be fees, depending upon the option selected. Another good resource for 529 plan information is the website savingforcollege.com.
If you are considering a 529 plan for future higher education needs, you may wish to check with your financial advisor regarding your particular situation and whether it makes sense to incorporate a 529 plan into college and/or estate planning.