The COVID-19 pandemic has everyone’s life in a spin, that’s for sure. Yet as we all know, time marches on. Our children and grandchildren (and ourselves, for that matter) continue to grow older. Their financial needs (yes, and our financial needs, as well) continue to grow. With the beginning of fall and back-to-school time, I always find folks are more inquisitive about funding for higher education (college, vocational and post-graduate education). Higher education and training are not getting less expensive. Quite the opposite. According to CNBC, the cost of college increased by more than 25% in the last ten years. For many of us, the total cost of our college education is less than one semester’s expenses today. Okay, so maybe I’m getting older. But suffice it to say, higher education is a large expense. In a February 2020 Forbes magazine article, in the U.S. currently we have 45 million people with student debt totaling $1.6 Trillion. That’s more than the total amount of credit card debt in the U.S. Wow! And, approximately 11.1% of these student loans are 90 days or more delinquent or in default. We can’t keep this up! It’s not fair to us as a society. Yet, we all want our children and grandchildren to further their education, enabling them more opportunities.
The enormity of this problem is hard to get our heads around. How do we solve this issue? Foremost, I believe we must do our best not to keep repeating this cycle of debt. I believe the solution starts with each of us in our own lives and in our own homes and with our own children and grandchildren. We have tools available that can help us. For example, there are savings and investment accounts that have tax advantages for the account holder (like “529” savings plans, pre-paid tuition savings plans, Coverdell Education savings plans, and custodial accounts – many times referred to as UTMA or UGMA accounts). The tax advantages are specific to each of these types of accounts and a bit too detailed for the space in this article. Most higher education savings plans have very low minimums, normally $250 to open the account. If you wanted to save on a regular basis, most allow you to start with $25 per month. Generally speaking, they are very flexible and make it really easy to save. In my 30+ years of experience I have found that parents and grandparents sometimes wish to pre-fund a child’s higher education. Higher education savings accounts are also attractive for some as an estate planning vehicle with tax benefits. Most higher education savings accounts allow you to contribute up to $15,000 ($30,000 for married couples) annually without gift tax consequences. Under a special election, you can invest up to $75,000 ($150,000 for married couples) at one time by accelerating five years’ worth of investments.
The underlying investments available inside these higher education savings accounts are almost limitless. They range from the ultra-conservative, like a money market account and fixed rate investments, to aggressive growth funds. There are also “target date funds” available in many of these plans. Target-date funds are actively managed accounts. In a nutshell, target date funds invest more aggressively in the earlier, younger years of the intended recipient, then as time draws near to use the proceeds in the account, the investment portfolio is re-allocated in a more conservative way.
Several years ago, the funds had to be strictly used for tuition in order to utilize the tax advantages. Now the monies in these types of accounts can be used not only for tuition, but also textbooks, most housing expenses, most fees, and even computer equipment for the student.
The bottom line: We must be willing to save for the future of our children and grandchildren. That’s the key to it all. Saving takes discipline and many times sacrifice. Many folks don’t know how to get started or understand their best options for helping their loved ones with higher education expenses. If you are interested in learning more about saving for higher education, please seek the counsel of your financial advisor. If you do not currently have a relationship with a financial advisor, my practice will be happy to assist you.
-by Ben Smith, Registered Principal, RJFS
About the Author: Beginning my professional career in 1986, I worked as an employee for a few firms until I started my independent financial advisory practice in 2005. My practice, Life Compass Financial, seeks to help individuals, families and small business owners chart a financial path for their future. Simply put, we help people. That is our goal. This is why we are here; this is what we do: We help people in any way we can, financial or otherwise. As the son of a mother who was a life-long educator and a father who was a pastor, my servant’s heart came naturally. This servant’s heart is the core of our being in this practice. In order to help people, we have to get to know them and their unique situation. That’s why we tend to ask a lot of questions. It helps us learn about the folks we want to help and how we can best help them. We feel this is one of the ways we are different. If there is any way we can help you, please feel free to reach out to us. We are starting a series of articles in SOKY on financial matters that we hope will be of interest and assistance to the readers. We welcome all questions and comments. We are located at 313 East 10th Ave. Bowling Green, KY 42101 – Phone 270-846-2656.
Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.
Ben Smith Life Compass Financial is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
