I’m a full-time financial advisor and a part-time tax nerd, but at this time of year, I wear as big a Santa hat as anyone. This holiday season, the young people in my life are all hoping for the latest tablet or gaming console, and I can help with that, but not without giving the most important gift of all: A secure future.
“I can gift the FUTURE?” you ask. Yes, by giving the gift of education without debt.
I often meet with parents who are experiencing “sticker shock” when they read the price tag for their kids’ education. Over the last 20 years, the cost of college and technical school has skyrocketed, far exceeding the rate of inflation. The average expenditure for an individual to attend public higher education is about $30,000 a year; private colleges run around $45,000. These figures are national averages, but it is not uncommon to see tuition and fees for nationally recognized schools in the $60,000 a year range.
Until recently, schools were raising their costs on the average of 6% a year. That percentage seems to have dropped, and we can only hope the flattening in tuition raises doesn’t mean cuts in vital courses and services. Should the rise in rates continue at 6% however, a four-year public education costing $120,000 today will cost $360,000 18 years from now. It’s possible the cost will be double that number for a private college. We don’t really know what the figure will be, but it’s safe to say it will be staggering for a young person starting out in life.
Our kids and grandkids are, even today, saddled with huge amounts of debt upon leaving school. If this continues, the impact on our economy will be staggering, as whole generations will be only marginal consumers using disposable income to pay off student debt in excess of $1 trillion. On a personal level, imagine your own kids or grandkids postponing the purchase of a new car, home or even starting a family.
If the United States is to maintain its position as a world leader, we must ensure our ability to produce well-educated, technically proficient graduates.
Will many of our bright young people have to go without a college education to avoid debt? This is a sad choice, and to me, personally, unthinkable.
A Family Affair
If you feel as I do, that passing our advantages to the next generation in the form of education is of vital importance, there are a number of options you can consider. And by the way, you don’t need to be a parent, grandparent or even a relative to take advantage of many of these options to benefit a deserving young person.
Very conservative folks may choose United States Savings Bonds. More growth-oriented individuals may opt for a Coverdell Educational Savings Plan (formerly an Educational IRA) or a Section 529 Plan. Others may choose to make an outright gift to the child under the Uniform Transfers to Minors Act (UTMA). There is always the possibility of borrowing on a retirement account. Student loans can be a last resort.
A Two-Pronged Approach
I ordinarily advise parents to employ a two-pronged approach in tackling the challenge of funding for college. In my view, a combination of a life insurance policy on the lives of the parents and 529 Plans funded by parents or grandparents works best.
Why life insurance? After all, many “experts” pan life insurance as a bad investment, saying you are “betting against yourself.”
The sobering fact is that today, Americans are less prepared to deal with financial loss than at any time in our recent past. Many households are living paycheck-to-paycheck and require two incomes to make ends meet. Everyone is concerned about job security. Unless you are a high-echelon employee of a major corporation, there is a good chance your life insurance coverage is modest, if it exists at all. Have you taken a look at your life insurance coverage? Can that amount replace the income of a lost breadwinner? Can it keep you in your home, let alone send your kids to college? Many households have barely enough coverage to pay off immediate debt.
If these questions cause you concern, the next step is to find out how to get the coverage you need at a cost you can afford. Volumes have been written debating the pros and cons of various types of insurance plans. You need to meet with a financial professional who will work with you to take into account the complete spectrum of your family’s needs. He or she will help you find the amount of coverage that really protects your family’s world and your children’s future should tragedy strike.
Grandparents to the Rescue
I often meet with grandparents who are living comfortably and resent being forced to take required minimum distributions (RMDs) from their retirement accounts starting at age 70 ½. Many people just don't like to be told by the government that they must withdraw money from their hard-earned savings and pay tax on the proceeds. They come to me seeking a good investment where they can park their withdrawals. If this is your situation, I’ll tell you the same thing I tell to many others: There is no better investment for your grandkids’ future than to fund their education.
Enter the 529 Plan
Parents and grandparents who are considering gifting the future through a 529 Plan have a number of questions. Many are enthusiastic about helping their kids and grandkids, but understandably want to maintain control. Some may be concerned the funds will be misused if their child doesn’t go to college or technical school. A Section 529 Educational Savings Plan is an ideal solution that offers the following benefits:
- High funding limits without the income limitation of other educational plans.
- A broad spectrum of investment choices.
- Tax-deferred growth.
- State tax benefits.
- Income tax-free distributions for a wide range of educational expenses.
- Control maintained by the contributor.
- Ability to change beneficiaries.
- Ability to rollover proceeds to another plan without tax.
- Less impact on financial aid than assets controlled by the child.
In summary, a 529 Plan is a method of funding for post-high school education. Assets grow on a tax-deferred basis and are federal and state income tax free, if used for qualifying educational expenses. Several states also provide additional tax benefits. Allowable expenses are tuition, fees and room and board paid directly to the institution. Books and equipment that are required by the institution for completion of coursework are also permitted expenses.
Coupled with a well-designed life insurance program, a 529 Plan can be a very rare gift in our new financial environment, both for you and your progeny. You can have the peace of mind of knowing that YOUR kids, along with hard work, will have the potential to build on your achievements and surpass them. It’s the gift of the American Dream.