Time to Hit the Books (and start saving for them too)!
Published: October 22, 2021
This fall, schools and universities have returned mostly to in-person. Yellow buses are once again a familiar sight on the roads, while college students have settled into their dorms and are well into their first semester classes. For many, however, this also means some hefty tuition bills for parents with children in college, particularly for those attending private institutions.
The increasing cost of higher education
It’s no secret that the cost of college has been steadily rising. According to data from The College Board’s Trends in College Pricing and Student Aid 2020, tuition and fees for a private four-year college have approximately doubled since 1990, while tuition and fees for a four-year public college have almost tripled over the same time period. For the 2020-2021 school year, The College Board estimated an average budget of $54,880 for a private four-year college, including tuition and fees, room and board, books, supplies, transportation, and other expenses. While tuition increases were below average for the past couple of years, due primarily to the pandemic, The College Board found the increase in tuition alone for the 2005 to 2015 period was 5% annually, far higher than the inflation rate.
Start saving now
You may decide to wait and pay a loved one’s tuition at the time it is incurred. As long as tuition is paid directly to the educational institution, it does not count toward your annual gift exclusion, regardless of the amount. If you want to plan ahead, however, it’s never too early (or too late) to start saving for your children, your grandchildren, or other loved ones, even if secondary school or college seems a long way off. The power of compounding means that the sooner you start putting funds aside, the more potential for growth you will have. If you want to start saving early, there are a number of ways to save for education, including using your annual gift exclusion ($15,000 per recipient in 2021 and $30,000 per married couple) to gift funds each year. If you want to ensure that the money is used for education or would like more control over the use of the funds, however, there are other ways to give:
529 Plans. These plans allow funds to grow, tax-advantaged, until they are used for qualified education expenses. 529 accounts, depending on the state, may also offer a state tax deduction on contributions. They also allow you to make a gift of five years of the annual gift amount as long as no additional gifts are made to the recipient within the five-year period. The downside of 529 plans is a relative lack of flexibility. Most importantly, they must be used for education expenses and, depending on the plan, investment options may be somewhat limited. And while they can be used for secondary school tuition, there is a maximum of $10,000 annually for that purpose.
Uniform Transfers to Minors Act/Uniform Gifts to Minors Act (UTMA/UGMA) accounts. If you want to maintain more control over how funds are invested and more flexibility in how funds are used, a UTMA or UGMA account may be an appropriate option. Contributions to these accounts are also exempt from the gift tax up to the maximum exclusion amount per year, although they do not have the five-year option that 529 plans do. Income generated in a UTMA or UGMA account may benefit from the $1,050 exemption amount and the minor’s lower tax rate on a portion of the income. In addition, while 529 plans generally have a maximum amount that can be contributed, UTMAs and UGMAs do not, making them good tools for wealth transfer.
For more complex situations, a trust may be the best approach, particularly if you wish to help ensure that assets are strongly protected for your beneficiaries. A trust can be highly customized to the specific situation and goal you are trying to achieve. Trusts can typically hold more unique assets that may not be easy to split up, such as houses, vehicles, and real assets. Trusts can also help to avoid probate. In addition, depending on what kind of trust you set up, there can be estate tax advantages.