Financial pathways: Other funding methods for college education (column)
November 1, 2016
In my last column I discussed 529 College Savings Plans. They are, in my opinion, the best vehicle for creating the funds necessary for our children's college education. The plan I like best is the University of Alaska 529 College Savings Plan, which is administered by T. Rowe Price. Accounts can easily be established online at their website. This plan is available to all U.S. residents, regardless of where they live. There are other methods for funding education, and I will go over some of them in today's column.
Let's start with scholarships. That is the first thing parents think of when they are contemplating college tuition for their children, particularly if they did not start planning early. It is important to realize that the opportunities for a full ride scholarships are very limited. Not every 18-year-old boy can get a football or basketball scholarship. Nor can every 18-year-old girl can get a volleyball or tennis scholarship. Hoping for one of these is not a plan. Partial scholarships and limited dollar scholarships for scholastics and athletics are possible but they will only supplement savings.
One such scholarship program is the CollegeInvest 529 College Savings Plan Scholarship Offered by CollegeInvest, a nonprofit division of the Colorado Department of Higher Education. Application can be made between January 9, 2017 through May 15, 2017 for up to $2,000 for the 2017/2018 school year. Several requirements apply including having had a 529 plan with CollegeInvest for two years, the beneficiary is enrolled in college or an approved vocational school and prior contributions of up to $35,000 have been made to the account on behalf of the beneficiary. Receiving up to $8,000 over four years is possible. The beneficiary must be a Colorado resident. See website for additional terms.
Coverdell Education Savings Accounts (CESA) are custodial accounts for and owned by the minor established as the beneficiary. All principal and growth on the account can be used for qualified education expenses including tuition, fees and books as well as room and board. Distributions are tax-free and assets can be rolled over into a 529 plan. Contributions to an account are limited to a maximum of $2,000 per year. Account assets must be distributed by the beneficiary's 30th birthday or the owner of account, or parent, will incur income tax and a 10 percent penalty on earnings.
“Not every 18-year-old boy can get a football or basketball scholarship. Nor can every 18-year-old girl can get a volleyball or tennis scholarship. Hoping for one of these is not a plan.”
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Gifts to Uniform Gifts to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts on behalf of minors are irrevocable. These accounts have been around for many years and at one time were the only vehicles used besides savings bonds and trusts to fund college education goals. UGMAs and UTMAs differ in that you can only invest in stocks and bonds in UGMAs while UTMAs also allow investments in real estate and royalties. Assets transferred to these accounts belong to the minor. Ownership by minors can preclude them from receiving financial aid for college. The custodian of the account, usually a parent, manages and controls the account until the child is an adult. At that time the account is moved into an account for the now adult child. Any funds left over from college funding the child can do with as he or she pleases. To drive this point home to my clients, I usually mention the potential purchase of a Harley! I recommend to my clients to monitor account values and to maximize usage for education expenses before child achieves majority age and it is too late. These accounts are also much less flexible than the 529 plan. One of the biggest drawbacks is that the funds cannot be transferred to another family member if funds are not needed for college by minor for whom account was established.
Although traditional and Roth IRAs were created for retirement income use, they can also be tapped to pay qualified higher education expenses. Funds can be taken out of accounts before owner is 59 ½ without paying a 10 percent penalty for early withdrawal as long as all funds withdrawn are used for educational costs.
More than likely you will combine funding vehicles to maximize college savings; this is fairly typical. That said, there should be one primary vehicle to maximize contributions and earnings. For most families this will be a 529 plan for each child.
Nancy Gardner is a Certified Financial Planner. She and her husband Bill split their time between Summit County and Montgomery, Texas. Send questions to her at firstname.lastname@example.org.
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