Helping Children and Grandchildren Pay for College
How can you help your loved ones with education funding?
The price tag for college is often higher than expected. According to College Board research, it will be more than $94,000, on average, for four years for a freshman who started at a public college in 2018. And it will be nearly $209,000 at a private school.1
Explore education funding options
When it comes to saving for education, you have a variety of account types to choose from. Here’s a brief rundown:
529 plan—A 529 plan account is one of the most tax-efficient types of educational savings vehicles. These plans offer tax advantages and may be especially attractive if you are concerned about estate taxes and want to reduce your eventual estate’s value.
A 529 plan account is one of the most tax-efficient types of educational savings vehicles.
Although 529 plans are state-sponsored, you may choose a plan offered by a state other than where you claim residency. However, your state may offer residents state-income-tax advantages that you’ll forego if you choose a different state’s plan.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in a 529 college savings plan. The official statement, which contains this and other information, can be obtained by calling your Financial Advisor. Read it carefully before you invest.
Coverdell Education Savings Account (ESA)—If you’re contributing $2,000 or less per child per year, you may be able to enjoy the tax advantages an ESA offers. Although these accounts have lower contribution limits and impose income eligibility restrictions, they offer more investment options than 529 plan accounts.
Custodial account—Uniform Gifts to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts allow you to give or transfer assets into a custodial account for a minor without creating a trust. The type of account available (UGMA vs. UTMA) varies by state.
Like Coverdell ESAs, UGMAs and UTMAs offer more investment options than 529 plans. But unlike both 529 plans and Coverdell ESAs, custodial accounts do not offer the same tax advantages. Custodial accounts may be subject to the “kiddie tax” rules.2
Along with the lack of tax advantages, a potential drawback of custodial accounts is your loss of control after the child reaches a specified age, typically 18 or 21, depending on the state. At this point, the child assumes full control over the account and can use the funds for anything he or she desires—including non-educational expenses.
Regardless of which funding option you choose, you’ll want to consider the potential effects of your savings on your child’s or grandchild’s eligibility for financial aid.
Do what’s right for you, too
Before sacrificing your own financial security in the name of higher education, settle on a balanced approach to create an education savings plan.
A good first step is to talk with your children or grandchildren about your intentions and limitations. Explore possibilities, objectives, and boundaries together as a family. Even if these conversations start when the children are still quite young, they’ll emphasize the importance the whole family places on education.
The efforts may even trigger more conversations around money, savings, and education that often never happen. This could help children—especially teenagers—understand the importance of saving for college and taking charge of their own financial futures.
- Contact a Financial Advisor to discuss how a college savings plan can fit into your investment strategy.
- Find an education funding option (or options) that fits your needs and financial outlook.
- Talk to your children or grandchildren about college dreams and savings.
1 Total yearly costs for in-state tuition, fees, books, and room and board (transportation and miscellaneous expenses not included). Base is 2018-2019 school year. Costs for all future years projected by Wells Fargo Advisors in November 2018 assuming a 2.8% national average increase per year for public and a 3.2% national average increase per year for private. Source: Trends in College Pricing. ©2018 The College Board.
2 Individuals under the age of 24 may be subject to the “kiddie tax” rules. The unearned income of an individual subject to the kiddie tax rules is taxed at trust tax rates.