Let’s take a few min­utes today to dis­cuss one of the great­est bud­get­ing tasks fac­ing Amer­i­cans fam­i­lies today, Col­lege.  Over the last fifty years more col­lege edu­cat­ed peo­ple have entered the work­force than ever before, mak­ing high­er edu­ca­tion an even big­ger ingre­di­ent to liv­ing the Amer­i­can Dream.

Many fam­i­lies today will tell you they have lit­tle or no fund­ing set aside for their children’s edu­ca­tion.  A good num­ber of these peo­ple have the resources to save, how­ev­er the task is so daunt­ing they claim defeat before even start­ing.  A state uni­ver­si­ty such as the Uni­ver­si­ty of Ken­tucky could cost upwards of $35,000 per year for tuition, room, and board in 2025 assum­ing a con­ser­v­a­tive 6% infla­tion rate.  How many of you paid less than that for your first home?  While the sit­u­a­tion is indeed fright­en­ing, an ear­ly start and the right research will help make your children’s dreams a real­i­ty.

There are real­ly 4 vehi­cles that can be used to save for high­er edu­ca­tion.  Select­ing the right option for you is impor­tant, but not near­ly as impor­tant as sim­ply get­ting start­ed.  Bor­row­ing mon­ey for col­lege can make the entire expe­ri­ence cost over twice as much as sav­ing ahead of time.  Stop pro­cras­ti­nat­ing and set some­thing aside!  When this first step has been made, you are com­mit­ted enough to begin explor­ing your options.

1) 529 Col­lege Sav­ings Plans — Two pros and two cons.  These are ter­rif­ic in that they can hold up to $250,000 at any one time, and all growth is tax-free when used for high­er edu­ca­tion.  Down­side fac­tors are that only one per­son at a time can be the ben­e­fi­cia­ry of the mon­ey, and it has to be used for high­er edu­ca­tion or you will pay tax­es and penal­ties.

2) Coverdell Edu­ca­tion Sav­ings Accounts – Many peo­ple refer to these as edu­ca­tion IRAs.  While these too can be used tax free, they can be used for any qual­i­fied edu­ca­tion expense such as pri­vate grade school or high school.  The big down­side to this option is a $2,000 year­ly con­tri­bu­tion lim­it which is nowhere near enough sav­ings to pay for school.

3) UGMAs/UTMAs – These accounts which are for chil­dren, yet con­trolled by a cus­to­di­an have few restric­tions besides the fact that at either age 18 or 21 it becomes the child’s mon­ey.  The ben­e­fits of hav­ing this mon­ey taxed at the child’s rate (assum­ing less than $1,700 in unearned income) might be out­weighed when Junior decides on a Corvette in lieu of Har­vard or Cor­nell.

4) Mom & Dad’s Mon­ey – This method­ol­o­gy assumes you save the mon­ey unre­strict­ed in your name to keep full con­trol, and sim­ply deal with the tax impli­ca­tions.  It is also impor­tant to note that a par­ent or student’s IRA can be used for high­er edu­ca­tion expens­es penal­ty free.

Mak­ing the prop­er deci­sion here depends on three fac­tors:

  1. How much mon­ey do you make?
  2. How much mon­ey do you have?
  3. How well do you know your chil­dren?

If you can answer at least a few of these ques­tions you can arrive at a con­clu­sion.  For instance a fam­i­ly with a young child might uti­lize a UTMA for the first few years.  Once they begin to know their stu­dent and their income they can decide whether to con­tin­ue this approach or begin using a more restric­tive sav­ings vehi­cle.  A fam­i­ly with excel­lent pub­lic schools in the area and a good stu­dent will like­ly ben­e­fit from going the 529 Plan route since they will not need the mon­ey for grade school or high school.  Just take a few min­utes to match your life with the options avail­able to you.  The right deci­sion could make your sav­ings plan wild­ly pros­per­ous!

We could dis­cuss finan­cial aid for hours (stay tuned to future newslet­ters), how­ev­er to keep your eyes from glaz­ing over and face from turn­ing blue I will keep it brief.  Finan­cial aid can play a role in your sav­ings deci­sion mak­ing.  Many of you will com­plete a FAFSA form if you have not already.  This tedious appli­ca­tion is what Uncle Sam uses to tell you how much aid you might qual­i­fy for.  If you are some­one who could poten­tial­ly qual­i­fy for aid, one sav­ings option is out of the ques­tion.  Parental assets count at 6% annu­al­ly toward your expect­ed fam­i­ly con­tri­bu­tion (EFC), how­ev­er stu­dent assets count at a stag­ger­ing 20%.  UGMA/UTMA accounts are clear­ly not the way to save if you have a chance at qual­i­fy­ing for aid.  Short of untime­ly death, divorce, or over­seas bank accounts (none of which I rec­om­mend) many fam­i­lies will not be qual­i­fy­ing for finan­cial aid.

Use this oppor­tu­ni­ty not as a time to get down, but a time to get even.  Whether your chil­dren or grand­chil­dren are 16 months or 16 years the time to save was yes­ter­day.  Take the infor­ma­tion you have and the bud­get you might have cre­at­ed last month and start sav­ing for high­er edu­ca­tion.  Get­ting the finances under con­trol and on track now will help ensure that come Fresh­man year your wor­ries are about Parent’s Week­end and what your child does with­out a cur­few, not about mak­ing the tuition pay­ment!