This week marked 529 College Savings Day, which highlights the importance of saving for future education expenses and encourages families to start saving early. This week also included a resolution to the high stakes debt ceiling debate in Washington DC. What do they have to do with each other? Both address the challenges that families and students have in paying for education.
The college years can be some of the most expensive for parents, so starting early is key. According to US News and World Report, the average cost for tuition and fees among ranked private national universities has risen by 134% since 2002. Importantly, income levels have not increased at the same pace. Education has become a disproportionately large expense, and 529 Plans help families to designate money to this goal. These tax-advantaged programs help you put money away for future education expenses: you invest, and the funds grow tax-free and are eventually withdrawn tax-free if used for education. You can check out this article on the details of how the programs work.
The debt ceiling deal, which should be signed today, includes a provision that lifts the freeze on student-loan bills that started in March 2020 due to the pandemic. As of August 30, those who hold student loans will need to start paying on them again. While you can still hold out hope that the Biden plan to wipe out up to $20,000 in federal student loan debt for some borrowers is approved by the Supreme Court later this summer, it is wiser to prepare to start paying down debt again.
Whether you are a parent accumulating funds or a borrower paying off debt, we have some strategy ideas about how to tackle education expenses:
Superfunding for high income parents. For high income families with young children, consider superfunding a 529 Plan. Contributions to 529 Plans are gifts, so annual contributions are limited to the annual gift exclusion, which is $17,000 in 2023. (Gifts above this amount are allowed but subject to gift tax). In this strategy, five years’ of contributions are allowed to be made in one year, which allows for more money to grow tax-free for a longer period of time. Each spouse can contribute $85,000, with a total of $170,000 for married couples.
Superfunding for high-net-worth grandparents. See the example above, except add multiple grandchildren and the unique estate feature of 529 Plans. 529 Plans are not part of the owner’s taxable estate, so gifts into the plans can help reduce the size of a person’s estate that may later be subjected to estate tax.. Grandparents with six grandchildren could reduce their taxable estate by over $1M in one day by superfunding 529 Plans ($170,000 per grandchild x 5 grandchildren = $1,020,000).
Preparing to pay student loans again for people of all ages and stages. 99% of student loan borrowers stopped making payments since they were paused three years ago. Those borrowers should start putting aside money now to reduce the impact when those payments resume this fall. If the Supreme Court approves the debt forgiveness, redirect the extra savings to another financial goal.
Consider a school that matches your whole family’s circumstances. After watching 20+ years of parents and grandparents send students to college, I am 100% certain that the price of a college education is not always correlated to the financial success of a person after graduation. It makes sense for families to look at public vs. private schools, in-state vs. out of state, and financial support – and then choose the school that best fits the desired outcome for the family and student to achieve the required education without breaking the family’s financial plan. And, if a high-income family expects financial support, they should focus on schools that offer merit scholarships in addition to financial scholarships.
Need more information on how to balance the high costs of an education with your total financial plan design? Email us at hello@bfsadvisorygroup.com to request a copy of the BFS Advisory Group guide, “Your Guide to Education Planning in Texas.”
Debra Brennan Tagg is a CERTIFIED FINANCIAL PLANNER™ Professional and the creator of the DBT360 Financial Plan, a proprietary program that helps her clients prioritize their goals, leverage their resources, and address their risks. She is the president of BFS Advisory Group and teaches the public and the financial services industry about the importance of values-based financial planning and investor education.