College Planning Options

As you probably know, college is expensive.  As you may not know, college costs are rising faster than inflation and almost no one is predicting that college costs are going to go down.  As a result, you may want to start thinking about funding your children’s college costs now.  The sooner you start thinking (and hopefully saving) the easier it will be. 

College Costs Today

According to the College Board, the annual costs (tuition, room, board, books, supplies, transportation, and other) of attending college for 2023-24 were about: 

• Four-year private college - $56,190
• Four-year public college for an in-state resident - $24,030
• Four-year public college for an out-of-state resident - $41,610  

While many students qualify for scholarships and other forms of financial aid to bring these numbers down, you may also want to consider some of the other costs (travel, entertainment) that may add to these numbers. 

Funding College Educations

For decades, parents have used custodial accounts to transfer funds to their children to help build assets for college costs.  However, the 2001 tax law has enhanced the tax benefits of other types of asset ownership that should be considered.  Coverdell Education Savings Accounts (Education IRAs) and Qualified Tuition Programs (Section 529 Plans) have become very attractive. 

Custodial Accounts

Using a Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minor Act (UTMA) account is an easy and legal way to transfer the ownership of assets to a child.  With a UGMA or UTMA account, the parent creates a custodial account on behalf of their child.  Assets are transferred into the account and the custodian (usually a parent) manages the account until the child reaches legal age. At that point, the child can do whatever he or she wishes with the assets. 

Transfers to these accounts are irrevocable. 

Coverdell Education Savings Accounts (Education IRAs)

Coverdell Education Savings Accounts provide parents and others the opportunity to save for a child’s education expenses in a tax advantaged account.  The annual contribution limit is $2000 for these accounts.  There are also income limits for those making the contributions.  

Earnings within the account are tax deferred and withdrawals are not subject to tax if they are used for qualified education expenses.  The new law expanded this definition to include expenses for elementary and high school expenses.  Withdrawals not used for qualified education expenses are subject to regular income tax and a 10% penalty.  Withdrawals must also be completed before the child reaches age 30. 

Education IRA accounts function like IRA accounts and are available from most banks, credit unions, brokerage firms and mutual fund companies.  Investment options vary depending on the firm.  Usually there is considerable flexibility with self-directed type accounts. 

Qualified Tuition (Section 529) Plans

These college savings plans are now offered by most states and were also enhanced by the 2001 tax law.  While the plans are offered by the state, there is no restriction on where the child attends college utilizing the funds.  One potential drawback is that there are usually limited investment options.  It makes sense to look at several states’ programs to find one that offers the investment choices you desire. 

With a Section 529 Plan, there are no income limits on the donors and contributions of up to $18,000 can generally be made without incurring a gift tax.  In addition, there are special provisions to allow a “front-end loading” of up to five years of contributions to be made without gift taxes, also called superfunding.  Withdrawals used for qualified educational purposes are excluded from federal income taxation.  

The Value of Starting Early

It can be easy to delay saving for college, especially if your children are young. However, by starting early, even with a small amount, you can make a significant impact on your future financial obligations. You can always increase your contributions as your income grows, but time can be your ally.

Savings Accumulation Table

Monthly savings	Accumulation after 5 years	Accumulation after 10 years	Accumulation after 15 years
$50	$3400	$7764	$13,364
$100	$6801	$15,528	$27,729
$150	$10,201	$23,292	$40,093
$200	$13,601	$31,056	$53,458

Chart is for estimation purposes only; assumes earning 5% and no income taxes.

 

What is the FAFSA?

The Free Application for Federal Student Aid (FAFSA) is available to all students to help cover the cost of a college education. The FAFSA offers grants that are given, loans that are borrowed, and work-study funds that are earned. What’s more, the information from the FAFSA is also used by many states and schools to aid in the distribution of state and institutional funds. The U.S. Department of Education redesigned and simplified the FAFSA in preparation for the 2024-2025 Award Year, making it easier for students and families to fill out the form online in less time.

Since financial aid is limited and can run out, it is imperative that students and families meet the application deadlines. Keep in mind that Federal deadlines may be different from deadlines imposed at the state level as well as deadlines set up by each college and career/trade school. Inquire with the schools of interest to confirm application deadlines to avoid missing out on funds that may be available to you as a student.

Completing the FAFSA

FAFSA typically opens in October of each school year. While students have until June 30 of the following year to submit an application, the sooner the form is completed, the better positioned you can be to meet state and school deadlines. The redesigned FAFSA form allows students to add up to 20 schools that they are considering regardless of whether an application has been sent or an acceptance letter has been received. The student will need to submit the FAFSA each year they are enrolled in higher education.

The interactive FAFSA form will help students new to the form to identify contributors to the FAFSA form. Contributors will be required to submit their information and give consent for the IRS to transfer tax information directly to the U.S. Department of Education. Standard information needed for each contributor includes full name, social security number, birthdate, and email address.

Preparing to Pay for Higher Education

Once the FAFSA has been submitted, schools will use the information to determine the aid each student may be eligible to receive. The FAFSA will calculate and make available to each student, the Expected Family Contribution (EFC). This calculation is used by financial aid offices to determine student financial need. For schools that are unable to meet full financial need-the cost of attendance less EFC-students may need to seek other means to fill the gap. Scholarship money is an option. Scholarships are widely available through college financial aid offices, high school counselors, and local business and community foundations. Since the schools, and not the U.S. Department of Education, are responsible for disbursing any aid, it is good practice to ensure the schools on your list have all the information they need, and whether any additional documentation is required before they send out an aid offer. While it is possible to submit corrections on the FAFSA form for certain fields, significant changes in family and financial situation should be addressed with the financial aid office for which you are requesting acceptance.

Some Conclusions

Enabling your children to attend the college of their choice and receive an education that will prepare them for a successful and productive life is one of the greatest gifts you can give. However, the costs of providing that college education can be significant. Starting earlier rather than later can make the process much easier, especially with some of the tax benefits offered by Coverdell Education Savings Accounts and Section 529 Plans. Be sure to consult with a trusted tax and financial advisor for more information. Developing a college savings habit can provide your children with the funds they need and give you peace of mind knowing that your child’s future is in good hands.