According to the U.S. Bureau of Labor Statistics, almost 70% of 2014 high school graduates enrolled in a college or university after finishing high school.  This is a figure that has shown an upward trend for decades.  As a result, most parents expect their child will graduate high school and attend college prior to starting their career.  It has become the norm for many.

That being said, the costs associated with paying for your children’s college are not necessarily affordable for the masses.  According to the College Board, the average cost of tuition, fees, housing, and miscellaneous expenses at a “moderate” in-state school are $23,410/yr, or $46,272/yr at a private college.  And it won’t surprise many people to know that college costs have been on the rise.  Over the past 9 years, college tuition and fees have risen 5.14% annually on average.  Compared to just 1.98% annually for overall inflation on all items, it appears the cost of a college education is becoming more and more out of reach for many.  If this rate continues, a newborn can expect to pay $57,700/yr at an in-state school or $114,000/yr at a private college!

Much has been made of the amount of debt students graduate with and the length of time they must work to pay off that debt.  As recent college graduates have begun starting families, two distinct camps are forming.  There are those who say, “I don’t want my children to graduate with the amount of debt I had” and others who say, “I worked my way through school and paid my student loans, so my kids can too.”

If you are in the first camp, you can probably tell the time to begin saving is now.  Fortunately there are several options to choose from, each with its own pros and cons.

  • IRC Section 529 College Program (“529 Plan”): This is one of the most popular options for college savers.  You contribute with after-tax dollars, but your contributions grow tax-deferred, and, if used for qualified higher education expenses, withdrawals are tax-free.  The downside is that if the money is not needed for college because the child receives scholarships, chooses not to attend college, or attends a less costly school than planned, ordinary income taxes plus a 10% penalty are due on the gains.  However, you have the ability to change the beneficiary of the account to another family member who may need the funds for his or her college costs which gives you an option to avoid the penalty.
  • Non-Qualified Investment Account: Investing in a non-qualified investment account titled in your own name offers you flexibility.  Should the money be needed for something other than your child’s education, you have the ability to take distributions without government penalty.  If the money is not needed for your child’s education, it can be used for his/her first home down payment, to help start a business, buy an engagement ring, or you could use the money for your own retirement.  For this flexibility, you give up the tax deferral available with some other options.
  • UGMA/UTMA: This type of account is similar to a non-qualified investment account, but income generated from the investments is taxed to the minor.  In 2015, the first $1,050 of earnings and gains are tax exempt, the next $1,050 are taxed at the child’s tax rate, and any earnings and gains over $2,100 are taxed at the parents’ rates.  The main drawback is that the money becomes the child’s at the age of majority (generally 18 or 21).  You have to ask yourself, “What would I have done with thousands of dollars when I was 18?”
  • Permanent Life Insurance: Another option for college savings is a permanent life insurance policy.  Similar to a non-qualified investment account, the cash value inside the policy is flexible and can be used as needed, whether that is to cover college expenses or not.  However, much like a 529 Plan, cash value accumulates tax-deferred, and if managed properly, withdrawals are tax-free.  Additionally there is a death benefit associated with the policy.  Cash value growth is more predictable than most equity or bond investments, so there is not the fear or needing to take money out just after the market has had a large correction.  That being said, the main downside is that growth potential in a permanent life insurance policy is not as large as that in most equity or bond investments and it may take some time before there is a positive “return” in the policy.  Policy loans and/or withdrawals also will reduce the cash surrender value and may reduce the policy death benefit. Taking a policy loan could have adverse tax consequences if the policy terminates before the insured’s death.
  • Financial Aid / Loans: There are many options for financial aid.  Aid is available needs-based or merit-based.  Additionally, various types of student loans are available to temporarily cover the costs, although these would need to be paid back after graduation.  It is important to pay attention to whether the loans are available to part-time students or just full-time students, needs-based, if the loans are subsidized or unsubsidized, if interest is capitalized or not, etc.
  • Scholarships: Last and certainly not least, there are many scholarships to choose from.  So many scholarships are available, and many only have a few applicants.  This should not be taken lightly.  We often suggest that parents make it their children’s “job” to research and apply for as many scholarships as possible beginning their sophomore or junior year of high school.  If necessary, you could incentivize your child by giving them a small amount of money for each scholarship they apply for.

So which college savings option is the best?  Here comes everyone’s favorite answer…it depends.  All of the options have their pros and cons, so a combination of two or more options may be best.  If you are ready to start preparing for your children’s college education, we are here to help.  Contact us today to meet one of our professionals with the experience and expertise to provide the answers you need.

Securities, Investment Advisory and Financial Planning Services offered through qualified registered representatives of MML Investors Services, LLC, Member SIPC, 12 Cadillac Drive, Suite 440, Brentwood, TN  37027 (615) 309-6300.  Continuum Planning Partners is not a subsidiary or affiliate of MML Investors Services, LLC or it affiliated companies.  CRN201711-197608

Continuum Planning Partners Post Author
Bryan Powell, CFP®

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