With tuition at many colleges exceeding $30,000 per year, planning for these expenses can be a daunting task. Here are a few points to consider:
- Most tuition bills are now paid with a combination of parental support, student employment, and loans.
- If you have to borrow money to get your student through college, try to make the interest tax deductible, as it might be with a home equity loan.
That being said, there is a case to be made for keeping the debt in the student's name. As an example, the graduate may land a high-paying job right out of school and is debt free while the parents continue to carry the tuition debt that enabled the graduate to land that high-paying job.
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If you're one of those who started planning for tuition payments when your child was still in diapers, you have a number of options available:
- Investments targeted toward long-term growth. If you have a time frame of 10 years or longer and are comfortable with higher risk, these may be a good choice.
- UTMA accounts: These accounts are held in the child's name and are taxed, for the most part, at the child's rate. The key disadvantage is that the child obtains full control over these accounts at the age of majority (18 or 21 in most states). Bear in mind that teenagers sometimes have minds of their own and if they control the funds you cannot insist the funds be used for education.
- A relatively new option is the 529 plan. This plan has some unique advantages for College planning and estate planning, such as:
- Earnings are taxed at the child's rate, like UTMAs.
- You can retain control virtually forever, unlike UTMAs.
- These plan assets are not included on the Financial Aid form, by ruling.
- Beneficiaries may be switched to another child, which might be helpful if the first child should be so fortunate as to receive a full four-year scholarship.
- Assets may be brought back under your control, which might be helpful if all of your offspring get full scholarships or for one reason or another you need to regain control of the funds. You will pay a relatively minor penalty for doing so.
These are just a few options and we have only discussed the highlights. Of course these issues should be reviewed with your accountant, financial advisor, and possibly your attorney before making any critical decisions
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