“An investment in knowledge pays the best interest.” Benjamin Franklin
While it’s probably not what Franklin meant by the above quote, The College Payoff–a study published by the Georgetown University Center on Education and the Workforce concluded that college graduates as a group have lifetime earnings the are 85% higher than
those whose formal education stopped with a high school diploma. That doesn’t even speak to the intangible benefits provided by a great college program.
Unfortunately, college is expensive. Tuition and fees run from about $9,500 per year at public universities to $30,000 per year and up at private colleges. So early planning and saving can make things a lot easier when the time comes for your son or daughter to pack that suitcase and head off to school.
Here is an overview of some common and not so common ways to save for college.
- 529 Plans. 529 plans are savings vehicles designed to encourage savings for higher education. Most states have 529 plans and although the plan you choose doesn’t have to be provided by your state, you should compare plans particularly if you have a state income tax. Distributions used to pay for qualified educational expenses are exempt from federal income taxes. Investment earnings and gains in the plans are not subject to federal income taxes. You can set up a 529 plan for anyone including yourself. The plans have a high contribution limits (many in excess of $200,000).
- Prepaid tuition plans. Prepaid tuition plans such as the Texas Tuition Promise Fund are designed to help families prepay for all or some of future tuition expenses at Texas public colleges or universities. Basically you lock in future tuition costs at today’s prices, but you are limited to state colleges.
- UTMAs. Uniform Transfer’s to Minors Act (UTMA) accounts allow adults to transfer assets to minors. Anyone can make an irrevocable transfer to the account. The first $950 of earnings in the account are exempt from taxes. After that, earnings are either taxed at the parent or the child’s rate depending on the amount. Upon reaching the age of majority, the child gains control of the assets and may use them as he/she wishes.
Here is an interesting investment for an UTMA account, although the investment can be done in any brokerage account and could be a good way to save for college:
Zero coupon municipal bonds: zero coupon bonds are bonds that are sold to investors at a discount today and mature at par value. The difference between the price today and the price at maturity is the investor’s return. For example, today investment Texas Permanent School Fund (PSF) guaranteed grade zero coupon muni bonds with a 20-year maturity are trading with about a 5.4-5.5% yield to maturity (YTM). So, if an investor buys a bond today, he would pay about $344.75 per bond that would be worth $1,000 in 20 years. Assume the federal gift tax exclusion is $14,000. The investor could buy 40 bonds with his $14,000 that would be worth $40,000 in 20 years. The gain would be tax free for Texas residents. Investors can ladder these bonds with different maturities and have a nice nest egg built up for college. It’s very important to pay close attention to the issuers credit quality as these are buy it and put it away types of investments. Also, these bonds can be hard to find.
James Mathis, CEO of Aspen Equity Partners (AEP), believes in enriching his clients’ lives by identifying, preserving and achieving their goals. Aspen partners with clients through every leg of their race ~ asset management, investment advice and retirement planning. Contact him at james.mathis@aspenequitypartners.com.
Disclaimers: The ideas presented here are for illustrative purposes only. This does not reflect the performance of any specific investment. It should not be assumed that past performance in any way relates to future results. The information herein has been derived from sources believed to be reliable, but this is not a guarantee as to the accuracy and does not purport to be a complete analysis of the security, company or industry involved. An investor should consider, before investing, whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s 529 college savings plan. 529 plans are subject to enrollment, maintenance, administrative and management fees and expenses. Non-qualified withdrawals are subject to federal and state income tax and a 10% penalty. Please consult with your financial advisor and tax advisor to determine the strategy that best suits your individual needs.