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To put it mildly, the cost of attending college in the U.S. is getting out of control and due to the known backstop of government aid and, more recently, forgiveness, colleges and universities aren’t compelled to cap tuition increases. Nor are they interested in reducing costs.
Several Ivy League colleges will cost more than $90,000 annually this year and a few are raising costs at paces that exceed inflation.
“Tuition for the next academic year at Brown University jumped 4.5%; at Dartmouth College, including fees, it rose 3.8%; and at Yale University, the bill including tuition, housing and meals increased nearly 4%,” according to Bloomberg.
Sure, there’s financial aid available to many families and many in lower income brackets will see the bulk of those enormous tuitions tabs defrayed or eliminated. Still, some folks will be paying $250,000, $300,000 and more to send a kid to college for four years. Worse yet, those jaw-dropping numbers aren’t confined to the most prestigious schools. Plenty with lesser reputations don’t have lesser tuition.
That confirms advisors and parents need all the tools possible at their disposal to adequately prepare for higher education spending.
Going Beyond 529 Plans
Many advisors and clients are familiar with 529 plans as the primary college savings vehicles. Contributions to 529’s are tax deductible, but the perks don’t end there. Equity income and bond interest payments earned within these plans aren’t taxable nor withdrawals, provided the capital is being allocated toward education expenses. In other words, advisors should tell clients the money they direct to a 529 can’t one day be used for a boat or a vacation home unless they want to deal with the tax consequences.
A less heralded avenue for education savings is custodial accounts. Though these plans lack some of the benefits of 529s, they have merit in their own right.
“When the child typically reaches age 18, 21, or up to age 25, depending on the state of residence, legal control of the account automatically becomes theirs,” notes Chris Kawashima of Charles Schwab. “For example, let's say a parent is managing a custodial account for their daughter. They may both agree that the money is for college expenses, but when the daughter turns 21, the account reverts to her and she can use the money for anything she wants—college, new car, vacation, or almost anything else.”
The primary advantages of custodial accounts are that the parents control how the funds in the account are invested and they can leverage the gift tax exclusion for some tax advantages. Additionally, custodial accounts have some flexibility not found with 529s, including the ability to use the funds for non-education related expenses for college students, such as cars, clothing and technology.
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