Unfortunately, it’s unlikely your village or anyone else for that matter is going to help you when it comes to paying for your child’s higher education.  Sure, there is financial aid, student loans, grants and scholarships, but can you or should you really rely on these sources?

In addition to many parents’ desire to help their children pursue higher education, there are competing goals such as retiring, buying a home that meets the family’s needs and/or taking yearly vacations.  Are you willing to postpone retirement or skip out on family vacations to pay the ever-rising cost of education?

Most people want their children to have a “better” life then they had.  In my opinion, education and a strong upbringing are some of the keys to success.  Fortunately, teaching your children morals, respect, work ethic, and so on, are free.  This article will focus on planning for higher education by concentrating on setting goals and education savings vehicles.

Setting Goals

The first step to any financial planning decision is setting and prioritizing goals.  Before you begin to set  education goals for your children, it’s my opinion that you should set your own goals for retirement and make sure you’ve taken steps to plan for emergency situations.  This includes having an adequate cash reserve or emergency fund in a savings account, life and disability insurance and an estate plan with a will, power of attorney, healthcare directive and trust/guardianship provisions for minor children.  As for retirement, I suggest making sure you’re saving enough in dedicated retirement accounts, such as, your company 401k, IRA or Roth IRA, etc., to meet your retirement goals before beginning to save for education.  This is one time where it’s okay to put yourself before your children.  As the saying goes, your children can get loans for education, but no one will lend you money to retire.

Once you’ve taken care of the basics, it’s time to consider what you’re willing and/or able to pay for education.  Would you like to cover 100% of the costs?  If so, is that to a state or private institution?  Would you prefer that your children have some “skin” in their own education?

You must first comprehend the cost of education to begin understanding what’s possible for your family.  The cost of education has risen above the general rate of inflation since the 1980s when states began steadily cutting funding for higher education.  Per the non-profit College Board:

• In-state tuition and fees at four-year institutions rose 2.9% in 2014-2015 and 2.8% in 2013-2014. These are the only years since 1974-1975 that the increase has been less than 3% (not adjusted for inflation).  Out-of-state and private non-profit tuition and fees increased 3.3% and 3.7% respectively in 2014-2015.
• In 2014-2015 the average tuition and fees for in-state students were $9,139 with room and board charges of $9,804 (total charges of $18,943 for residential students). The average out-of-state tuition and fees were $22,958 with total charges of $32,762.  The average private tuition and fees were $31,231 with total charges of $42,419.

Let’s assume you have a child today and want to cover 100% of his or her cost of college.  Using the above total charges and assuming college inflation of 4% and an expected return of 6%, we can make the following projections:

Institution	Projected Total 4 Year Cost	Monthly Savings Needed Day 1
In-state	$162,958	$352
Out-of-state	$281,837	$610
Private	$364,912	$789

Clearly, when you’ve just left the delivery room, you have no idea what your child’s aptitude will be or even if college is the right path for them.  Don’t let that be a deterrent to setting your goals for education.  Remember, your goals should be realistic and actionable.  These are just your goals for what you are willing to and/or able to save for your children.

Education Savings Vehicles

I’ve placed a grand importance on setting goals.  Ultimately, you’ve got to start saving and the sooner the better.  I’ll focus on the pros and cons of three highly utilized investment vehicles that can be used for higher education: the 529 Plan, the Roth IRA and the UTMA account.

529 Plan

Pros:

• Special tax benefits provide tax-free growth of your investment if used for qualified higher education cost including tuition, fees, room and board, books, computers and supplies. Visit https://www.irs.gov/publications/p970/ch08.html for more details.
• Many states offer a state income tax deduction for contributions made to a 529 plan.
• You can often choose between a plan that offers investment options or a “pre-paid” plan that keeps up with education inflation.
• Considered a parent’s asset for financial aid purposes. Qualified distributions are not considered income for financial aid.
• Can change the beneficiary (namely the child) of the plan at any time. So, if you have “leftovers” from one child, you can simple switch the beneficiary to another child.

Cons:

• If the 529 plan is not used for higher education, then distribution of gains will be taxable and subject to a 10% penalty (exceptions to the penalty do exist if your child gets a scholarship).
• Limited investment options and you can only make one change to your investment strategy per year.
• Advisor sold plans carry high fees and sales charges. These can be avoided by working with a fee-only financial advisor that can direct you to a plan without sales charges and still help you make investment decisions.

Roth IRA

Pros:

• Provides flexibility to be used for either education or retirement. The Roth IRA was established to be a tax-free savings vehicle for retirement, however since you don’t get a tax deduction for contributions, you can withdraw your contributions at any time without paying tax or penalties.  Therefore, you can use your contributions to fund education and leave your earnings in the Roth for your retirement.
• Virtually unlimited investment options and you can change your investment strategy as often as you’d like.
• Can be a great starting place for those with young children or concerns about whether their children will pursue higher education.
• At this time, the asset is not considered for financial aid purposes because it is considered a retirement vehicle.

Cons:

• Contribution withdrawals are considered the child’s income for financial aid purposes.
• If you withdraw earnings prior to age 59 1/2, the earnings are taxable and subject to a 10% penalty. Therefore, you need to keep track of the contributions you make over the years.
• Contributions are limited to $5,500 per years and the ability to use a Roth IRA is limited by your income (higher income earners may not be eligible to use a Roth IRA).

UTMA (Uniform Transfers to Minors Act)

Pros:

• If you’re in a high income tax bracket, transferring assets into the child’s name with you as the custodian will reduce the tax burden on dividends, interest and capital gains.
• Virtually unlimited investment options and you can change your investment strategy as often as you’d like.
• Can be used for any purpose that is in the interest of the child (once assets are transferred to the UTMA, they are the child’s asset).

Cons:

• Considered an asset of the child for financial aid and educational scholarships. Income generated by the account is considered income of the child for financial aid.
• You are gifting these assets to the child and they take control of the account at age 18 or 21 depending on your state.
• Contributions should be limited to $14,000 per year to be excluded from the gift tax.

Education planning can be complex and often takes a multi-faceted approach to maximize the economic benefit you and your child can receive from such planning.  In this article, I haven’t even delved into the complexities of financial aid, because a whole article on financial aid is justified.  For information on financial aid, visit www.finaid.org or https://fafsa.ed.gov.

For a complimentary initial consultation with a Bluesphere advisor, call 610-277-1515.

Bluesphere Advisors LLC is a Registered Investment Advisor.  Bluesphere advisors offer fee-only financial planning and investment management.