Beyond 529s: More ways to fund an education

We’re starting from the premise that you want your kids to go to college. The long-overdue national debate about how useful a bachelor’s degree is has finally begun, and we welcome it. This debate also addresses how the celebration of that degree crowds out opportunities for people with do-skills rather than sit-skills and, of course, how immensely overpriced a four-year college education is.
We should all agree that the next generation deserves the chance to be solidly in the middle class after mastering a craft. They should have a shot at something even better paying if they have an entrepreneurial spirit and Fortune’s favor. Such was the way of the world back when market capitalism was first defined.

But today the most likely path to prosperity crosses a stage full of people in robes and funny hats.

Those caps and gowns, though, are getting prohibitively expensive, even for the wealthy. If you’re saving to send a child to a private university, you need to sock away around $200,000. The balance of the average college savings plan is one-seventh of that.

And how many kids did you say you have? Depending on your answer, their college expenses could add up to more than your mortgage. In any event, your children’s education ranks right up there with the family homestead and a comfortable retirement when it comes to the need for financial planning. So, let’s look at some ideas on how to pay for it.

Review session

If you already know this basic stuff, feel free to skip down to the next heading. But for those who didn’t do their homework:

  • 529s: The college savings plan we mentioned above is called a qualified tuition program or, more frequently, a 529 plan. These state-chartered accounts are usually tax-deferred savings plans, like a qualified retirement account. While there’s no legal limit on annual contributions, you could trigger gift tax issues if you exceed $18,000. Nine states, though, offer the opportunity to prepay your children’s tuition expenses – often locking in tuition costs as of the time that you open the account. This prepaid plan is great – providing there’s no question that your child will attend an in-state school. Also, prepaid plans are for tuition only, and can’t be used for room, board or other expenses. There’s additionally something called a Coverdell plan, which we’ll just mention briefly. It’s a self-directed educational savings plan that gives you more latitude in how you want to invest the money, but you can only add $2,000 per year. Think of it as a supplement to the 529, not a replacement for it.
  • Scholarships: If your kid is smart, athletic or talented, schools will find ways of waiving a portion of the tuition. Also, you should consider hitting up any organization – profit or non-profit – with which your family is affiliated. Your employer, your church and your professional association or union are all places to inquire about scholarship opportunities. So are fraternal organization and youth groups. Further, there’s no shortage of companies and philanthropies that offer tuition assistance. Don’t get overwhelmed by the tall stack of paper; it might take an hour or two to do the first application, but maybe only about five to ten minutes to do each subsequent one.
  • Grants: Don’t assume you make too much money for needs-based scholarships. If you’ve been working with a financial advisor to drive down your taxable income, you might also limbo under the bar for eligibility for Pell grants, federal supplemental grants and state-level equivalents. Besides, the U.S. Department of Education also has set-asides for military veterans, children of active-duty service members and those who agree to become classroom teachers or otherwise serve the public. Recent legislation increased federal grant money for families with farms or small businesses as well.
  • Work study: Your college-aged child might qualify for federally subsidized go-fer work in one of the school’s academic departments or administrative offices. For that matter, they could cross the street from the school and flip burgers for the same money. Probably the sweetest deal on campus is as a residence assistant. A kid who goes the RA route after freshman year gets a free room plus a stipend. Making sure that a floor full of 18-year-olds don’t get caught doing something stupid is a lot of responsibility, but not actually a lot of time-intensive work.
  • Loans: Stafford loans from the U.S. government – either subsidized or not – might be a good deal for you, as could Perkins loans, which come from the schools. Your state – or the state your child’s college is located in – might have more funding available. But don’t be fooled by the private lenders out there who charge higher interest for loans which will never be forgiven under any circumstances.
  • Community college: When you’re touring colleges, ask the question the university administration hopes you won’t ask: “Is there a two-year school you recommend as a feeder?” Turns out, you can get the same UCLA or Loyola Marymount degree after spending your first two years at Pierce College, a much less expensive community college. On the East Coast, New York University famously partners with more than a dozen local, two-year public colleges. One consultant offers a guide to leap from community college to the Ivy League.

By the way, the first step in getting any financial aid is to fill out the FAFSA form, here. SavingForCollege.com offers great advice for filling it out. And one last note about the 529: Since 2019, it can be used for skilled labor apprenticeships as well as academia.

Extra credit

Still, those aren’t the only ways to save for college. Here are a few ideas you might not have known about, which you could use as either a replacement for or supplement to the classic 529:

Roth IRAs: Your kids’ eligibility for federal financial aid is a factor of their parents’ assets. Money in a 529 counts toward that factor, but money in an IRA or Roth IRA doesn’t. A Roth IRA can’t completely replace the savings that can build up in a 529 account due to contribution limits, and you should consider tax effects, holding periods and maximum income ceilings as well – not to mention that, like a 529, an IRA — Roth or otherwise — can also lose money. Even so, you can withdraw funds from one for college expenses without penalty – and one report suggests that at least 14% of IRAs get tapped for educational purposes – either by direct withdrawal or by taking out loans secured by them. Like a Coverdell plan, think of an IRA or Roth IRA as a funding channel supplementary to a 529. This year, the big news in college saving is that owners of 529s can make tax-free, penalty-free rollovers from their 529 accounts to Roth IRAs, subject to limitations. These changes, stemming from the SECURE 2.0 Act, enable savers over age 50 to transfer up to $8,000 per year – otherwise up to $7,000 – and $35,000 lifetime. This helps avoid taxes on unused 529 funds, turning them into a head start on retirement savings for the young adult. The Roth receiving the transfer must be at least 15 years old and in the name of the beneficiary so, practically speaking, the time to start planning this move is when the kids are still in preschool. Also, any funds transferred must have been held in the 529 for at least five years. The Internal Revenue Service hasn’t yet provided firm guidance on restrictions related to income limitations, so you might need to be careful there.

UGMAs/UTMAs: Accounts established under the Uniformed Gift to Minors Act don’t have all the tax benefits of 529s, so they are generally less attractive. Also, their value counts toward parents’ assets for FAFSA purposes. Like Coverdells, though, you can invest UGMA funds in any kind of securities you like. Accounts established under the Uniform Transfer to Minors Act go further, allowing for investments in real estate, collectibles, and even cryptocurrency.

HELOCs: Home equity lines of credit don’t have the tax advantages of a 529, and you can’t even deduct the interest payments as you would if you were using the money to improve your house. Still, the interest rate will be lower than taking out an unsubsidized loan – and certainly lower than putting any portion of college bills on your credit card. This could also be your best bet should you want to refinance a student loan. So as long as you’re aware that you’re literally betting the house that you’ll be able to keep up with the payments, a HELOC might play a role in your education funding plan.

Life insurance: No, we’re not suggesting you go to your final reward to pay for your kids’ college. We note that borrowing against your policy’s accrued value is one option.

Class dismissed

These aren’t all the options, but most people paying for college use some combination of what we’ve listed here. Before considering the optimal mix for you and your family, you might want to discuss your situation with an advisor. If you would like to take advantage of a personal consultation with one of our Wealth Advisors, please get in touch with us today!