Building a Sensible College Savings Plan

Putting aside money for your child’s college expenses can save you money and eliminate financial stress in the long run, while allowing your child to pursue the education necessary for their future success. Studies show that parents recognize this, and a majority are either saving, planning, or both for college expenses.

Even if you already are contributing to your child’s future education, you may not be aware of all the options available. Refine your budget to start contributing regularly to your child’s college savings account or reevaluate your current strategy with these four structured savings options (in some cases tax-advantaged—be sure to ask your tax-advisor or accountant):

529 plans—Investments in 529 plans grow tax-deferred and feature federal tax exemptions for funds withdrawn and used for higher-education expenses—a couple of the reasons they are the most favored option when saving for future education. EducationData.org reports that 30% of savings accounts are 529 plans, which is by far the largest percentage when compared to other options.

Every state offers at least one 529 plan, but each has a different investment portfolio. Check your state’s plan to see what expenses are covered, as many plans have recently expanded what funds can be used for. Take note that it’s possible to apply for any state’s 529 plan, as well as those offered by private lenders.

UGMA and UTMA accounts—Similar to trusts, Uniform Gift to Minors Accounts (UGMA) and Uniform Transfer to Minors Accounts (UTMA) allow you to invest in your child’s education by transferring income-producing assets into your child’s name. Like custodial accounts, these accounts allow parents to invest and save money (without limit) while maintaining full control over the accounts.

Compared to 529 plans, UTMA and UGMA accounts have less appeal when it comes to their impact on financial aid eligibility. UGMA and UTMA accounts are reported as your child’s asset, which reduces his/her financial aid eligibility by 20% of the asset value, whereas 529s are reported as a parental asset and reduce aid at a much lower percentage (up to 5.64%). These plans also offer less built-in tax advantages for contributors compared to other college savings vehicles.

An upside, however, is that funds in a UGMA/UTMA account can be used for expenses outside of direct education costs without penalty as long as they are used for the benefit of the child (if drawn by the custodian prior to maturation). This could include expenses that would otherwise be non-qualified in a 529 plan. As such, using a UGMA/UTMA account in tandem with a 529 plan can help to ensure that more of a student’s total expenses are covered down the road, including testing fees, transportation costs, health insurance, medical bills, and other expenses.

Traditional Savings Accounts—You may already have individual savings accounts set up for each of your children so that you have a place to deposit those incoming birthday checks from their grandparents. These accounts make depositing super easy, especially if your child is working and also contributing to the savings account. The downside is that most traditional savings accounts earn lower interest rates than the other options listed here.

Bottom Line: You Have Options

You could decide that more than one of these options is best for you and your child’s education. You may choose to spread your savings across a 529 plan, traditional savings account, and a UGMA/UTMA account. Each family’s circumstance is different, and it’s important to know your options to make the best decision for your child’s future.

Bonus:

There are numerous helpful online calculators at your disposal, including trust fund calculators that will determine the net present value (NPV) of a trust fund, and financial aid calculators that will help estimate your EFC (expected family contribution) and financial needs based on income, assets, number of children in college, etc. Use these tools to aid you through the college savings process and consider all options available sooner than later when developing your savings strategy.

Sterling National Bank can help you plan for college and beyond. Visit one of our Financial Centers, call us at 855.274.2830, or check out our College Planning Resource Center for more information on different savings strategies.