In La Jolla, many families have children attending local colleges such as the University of San Diego, San Diego State University, University of California San Diego and many others. The costs of these colleges can be very expensive. Estate planning can assist in parents discussing college and other expenses for their children in the event they are deceased at the time the children enter college. Revocable living trusts can be used for funding college educations. Our law firm of Law Office of Scott C. Soady, A Professional Corporation, LLP would be pleased to offer you a complimentary and confidential consultation. Please e mail or call us. Our firm does not recommend or endorse any 529 plan or other financial instrument.
The steady rise in the cost of attending college may have become one of those few absolute certainties in life, along with death and taxes. Tuition and fees for public and private institutions alike can seem overwhelming, especially if parents have done little financial preparation ahead of time. Some solace can be taken in the fact that there is a wide variety of approaches for saving for college. For parents who have some foresight, the use of a plan that is tailored to their circumstances can at least soften the blow of financing a college education.
With mutual funds as the primary investment option, state 529 plans are best for those looking to contribute substantial amounts to a college fund. Earnings are tax-free, as are later withdrawals for qualified education costs. These plans generally are in the parents’ names, which means that the plans have minimal effects on the family’s eligibility for financial aid. The drawbacks are limited investment options and relatively high fees.
A prepaid tuition plan makes the most sense for families that are reasonably certain that their child will attend one of the schools in a state’s plan, and that are satisfied with a rate of return that equals the inflation rate for the costs of schools in the plan. Under prepaid tuition plans, you are buying future tuition at a state’s public colleges at today’s prices. On the downside, payouts from these plans reduce eligibility for financial aid on a dollar-for-dollar basis. In addition, states dealing with especially tight budgets have been raising the costs of participating, and in some cases have been temporarily closing off enrollment.
For a group of approximately 250 private colleges, there are independent 529 plans. They work like state prepaid plans, including the dollar-for-dollar reduction in financial aid eligibility when funds are distributed. Money from such a plan can be rolled over to a state 529 savings plan or a state prepaid plan without penalty.
Coverdell Education Savings Accounts
If you want the most variety in investment options and lower fees, a Coverdell account may make sense. Joint income tax filers with adjusted gross incomes of up to $220,000 can save up to $2,000 a year, tax-free, for education expenses. No plan is without its weaknesses, and for the Coverdell accounts it is the adverse effect on financial aid eligibility because the accounts are in the student’s name, not the parents’ names.
A custodial account is appropriate for those who want to transfer assets, including securities, to a young beneficiary in order to reduce taxes. However, be forewarned that the beneficiary will have control over the account upon reaching the age of majority. Funds can be taken from the account at any time and for any purpose benefiting the child, not just educational expenses. Withdrawals are taxed at the child’s rate.
If the 529 plans are the showhorses of financing in higher education, savings bonds are the workhorses. Returns on savings bonds are usually modest, but the investment could not be safer. Savings bonds may be especially attractive to middle- and low-income households that fall within certain income restrictions. For Series EE bonds issued after 1989, and all Series I bonds, at least some of the interest earned on the bonds is tax-free if used for higher education expenses.
These approaches to saving for college are not exhaustive, and the descriptions here only scratch the surface. Professional advice can help a family craft a plan that is best suited to its needs and priorities.