College Planning: A Guide to Saving Effectively for Educational Expenses

College expenses have jumped dramatically. The average annual tuition at a public university is about $11,000 for in-state students and $28,000 for out-of-state students. Private universities average around $39,000 per year for tuition. Students also incur costs for books and supplies. Most must also pay living expenses.

At the same time, a university education is one of the most valuable investments you can make for your child’s future. On average, someone with a bachelor’s degree will earn nearly 68% more than someone with only a high school diploma.

Giving your child a debt-free university education is possible with some long-term college planning. You have several options for strategically saving for college.

Savings Account

A joint savings account is the most basic form of saving for education costs. You and your child hold the account together. It will automatically pass to the other joint holder without going through probate if one of you passes away.

A variation on this option is a custodial savings account. This account automatically passes to your child when they turn 18.

Savings accounts usually pay interest, adding to the eventual balance. However, a traditional savings account does not offer tax advantages; the IRS taxes any interest as regular income.

529 Plan

A 529 plan is a savings account operated by the state or an educational institution designated for educational expenses. The initial contributions are not tax-deductible, so you will fund these college savings accounts using post-tax dollars.

However, the interest or other growth in the account is not taxable as long as it is used for qualified education expenses. Thus, this option is superior to an ordinary savings account because the balance will grow tax-free.

The downside is that the funds must be used for the beneficiary’s educational expenses. If the beneficiary chooses not to attend college or if there is money left after they graduate, you have limited options for withdrawing the balance without paying a penalty on the earnings. You might avoid this penalty by rolling it into a Roth IRA or changing the beneficiary.

Education Trust

An education trust is another college planning tool. A trust is an arrangement in which a trustee holds property, such as your child’s college savings, and disburses it according to your instructions.

A trust is not as limiting as a 529 plan because you can instruct the trustee to distribute the funds for a wider range of costs, such as a vehicle purchase. Moreover, a trust can protect your assets from creditors as long as it is irrevocable.

The downside of an education trust is that any increase in the value of the assets it holds is taxable. It is also considered an asset when a college determines your child’s eligibility for financial aid.

College Planning Strategies

Your choice of savings strategies depends on your goals, needs, and risk tolerance. Some options are good for certain goals, like reducing taxable income, while others have the advantage of flexibility.

At Mason Law and Planning Group, we’re here to help. To discuss some effective ways to save for educational expenses, contact us to schedule a consultation.