How should I save for my child’s education?
We all have different goals in our lives. It can be as simple as “financial independence,” or more specific goals, like traveling as much as possible or starting your own business. For those who have children, a major goal is often helping their children with the growing cost of education. In fact, the CollegeBoard’s Trends in College Pricing 2016 gives us some data on that growing cost. Between 2006-07 and 2016-17, published in-state tuition and fees at public four-year institutions increased at an average rate of 3.5% per year beyond inflation.
What can you do?
First I want to preface the rest of this article with a broad, sweeping declaration. You should NEVER, I repeat, NEVER make education planning a priority over your own financial security and retirement preparedness.
That being said, if you are on track with your own finances and are looking to help give your children a good financial start as well, there are some great options available to you. I want to focus on three in particular, which are outlined in the table below:
As you can see, the major differences are centered around ownership, use of the funds, and tax treatment. Additionally, each account will have a particular impact on potential financial aid. Need-based financial aid is partially based on Expected Family Contribution (EFC), which is affected by assets owned by both you and your child. However, 20% of student assets are counted towards EFC, while only 5.64% of parents’ assets are counted. From that perspective, assets are better off owned by you.
When is each account optimal?
Custodial: As the only account that truly becomes the child’s once they reach the age of majority, this should only be used in cases where you want the money to belong solely to the child and used at their own discretion. This is a better option in cases where someone is just looking to make a gift to the child, not necessarily fund their education.
529: If you’re completely committed to funding future education for your children, this is the best option. It remains under your control, has a lesser impact on financial aid calculations and can benefit other family members if the original beneficiary doesn’t need the funds.
Brokerage Account: If you want to save for your child’s education but also want flexibility to use the funds for other needs, a brokerage account will be the best option. The money is yours to use as you see fit.
Keep priorities in mind
When it comes to financial planning, I firmly believe you must take care of yourself before you can take care of others. Naturally, this impacts my thoughts on education planning. You should only save for your children’s education if you are in good shape for your own life and retirement. Your child can get scholarships and student loans to help them through college. You cannot do the same to help you through retirement.
With that in mind, if you are in good financial shape, I tend to lean towards a 529 plan, a brokerage, or a combination of the two. It ultimately depends on your wishes for the money. As always, the best advice will depend on your particular situation. If you feel you are on the right track financially and want to begin helping your children do the same, reach out to us in order to get them on track to live their best lives.