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There’s inflation and then there is INFLATION. College costs are in the latter category. That much is confirmed by the following two nuggets courtesy of the Education Data Initiative (EDI).
“After adjusting for currency inflation, college tuition has increased 197.4% since 1963 (and) the cost of tuition at public 4-year institutions increased 36.7% from 2010 to 2023,” according to EDI.
Translation: colleges costs are on a more than six-decade upswing and even the schools that were previously considered inexpensive aren’t so much anymore. As EDI points out, since 1968, the average annual tuition increase at state schools has been 6.53% while private non-profit universities hiked tuition at rate of 4.53% per year.
Increases like those make it difficult for families to adequately save for heirs’ college expenses and it’s why so many parents and kids are burden with student loan debt. Fortunately, there are avenues for mitigating some of those liabilities, including 529 plans. Advisors often recommend 529s to clients that are parents and grandparents because there are tax perks.
Equity income and bond interest payments earned within these plans aren’t taxable nor withdrawals, provided the capital is being allocated toward education expenses. For the current tax year, the limit a single parent faces on 529 contributions is $18,000. For married couples, its $36,000. Those are decent amounts to be sure, but some parents may want to save more and that’s possible with some homework or the help of an advisor.
Other College Savings Tool
Advisors that have been in business awhile may be aware of the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act, which paved the way for the creation of UGMA or UTMA accounts. In simple terms, those accounts can be alternatives or complements to 529 plans.
There’s also a big difference between UGMA/UTMA accounts and 529s. Depending on the state in which the UGMA or UTMA is established, the child for which the account was established becomes the legal account holder at 18 or 21 to 25 years old.
“The main benefit of a custodial account is that parents can take advantage of the gift tax exclusion to fund the account while maintaining control over how the money is invested and spent while the child is a minor (as long as it's for their benefit),” notes Chris Kawashima of Charles Schwab.
Advisors should also point out that UGMAs and UTMAs are useful for things such as cars, clothes, food and off-campus housing – all the stuff college kids love buy are unlikely to be able to afford on their own without working and help from family.
Another Big Point to Mention
One of the reasons clients are clients is because they rely on advisors for information they view as complex or tedious. Saving for college isn’t necessarily either of those things, but there are big differences between 529s and UGMA/UTMA and they go beyond the tax issue noted above.
For example, advisors need to mention to clients considering UGMAs or UTMAs that those accounts can actually reduce the level of financial aid granted by universities to the student. That’s a major point and one that needs to be discussed with clients.
Because the money in a custodial account belongs to the child and not the parent, federal financial aid formulas consider 20% of the money available to pay for college,” adds Kawashima. “Compare this to 529 plans, which are given more favorable treatment for financial aid. (The Free Application for Federal Student Aid [FAFSA] formula considers a maximum of 5.64% of the money to be available in a parent-owned 529 plan available for college because the money is considered the parent's assets and not the child's.)”