College is tremendously expensive, and there is no end in sight to increases. Smart parents plan for this expense early on, often with a financial advisor. There are several factors involved.
When selecting your financial advisor, be sure to be aware of what the fee structure is. Some charge a percentage (often 1%) of assets. This can add up over time. If you consider yourself savvy, consider selecting a “for fee” financial planner. These professionals bill you for their consultations, like seeing a doctor or any other professional. Some say it’s a better model because there isn’t any pressure to sell any financial products.
When it comes to saving for education, the big thing you need to know is 529. It’s a government plan that allows tax-free investment growth and withdrawals. It can be used to pay for tuition, books, housing, and other qualified costs. Sometimes there are tax benefits as well. Funds can be guided to other children, so don’t worry about over contributing.
For those who use private schooling, a 529 can be used for K-12 education as well.
Outsiders can Make Contributions
For example, if your grandparents want to help pay for their grandchildren’s education, they can put in funds for the 529 as well.
Choice of Plan
Through an advisor, there are dozens of plans available. Some of them offer a “target date” feature where allocations for stocks and bonds are automatically reallocated based on how close the target enrollment date is.
There are other options to a 529. The UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) hold assets in custody. There are certain tax benefits, particularly the lower tax rate of the child. One big downside is that you can’t restrict if your child doesn’t pursue any education after high school. The transfer can’t be reversed and could hinder college financial aid.
Some states offer prepaid tuition to their public university. This is only in a few states, but some of them have excellent flagship campuses that rival many private universities.
Lastly, you have regular taxable investments. It’s less tax-efficient, but the benefit is you can withdraw without any penalty.
Saving for college doesn’t have to be a nightmare. With proper planning and determination, your children will be able to graduate from an excellent university.
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