Planning for Education Expenses? Start Early

Student debt is at a record high with approximately one million people defaulting on their college loans every year, according to a report from the Urban Institute, a nonprofit research organization. With the cost of education likely continuing to grow, planning for a child’s or grandchild’s education may be more important now than ever. 

Clients have asked me, “how much should I save to help a child or grandchild pay for their education.” I’ve found that people under-estimate the value of consistently investing a relatively small amount over a long period of time. For example, investing just fifty dollars a month, starting at your child or grandchild’s first birthday, and assuming a moderate rate of return, could amount to fifteen thousand dollars by age nineteen. A little bit can go a long away using the power of compounding interest – “the eighth wonder of the world,” claimed Einstein. 

Where should you save or invest money for a child’s education?

There are many different vehicles that people can use to save for a child’s or grandchild’s education. They can, for example, use a 529 plan, an Education Savings account, a UTMA, a prepaid tuition plan, a Roth IRA, various brokerage or savings accounts. While any of these options may help families prepare for or offset student loans, some may be better than others. So, where should you save or invest money for a child’s education? 

The goal for most folks in reducing their children’s educational debt is to ideally give them a leg-up in pursuing opportunities, cut the amount of interest paid, and avoid default. There are two mainstream savings options that are specifically designed for educational expenses: the 529 plan and an Educational Savings Account.

The 529 Plan has a high contribution limit (currently matches the annual federal gifting limits of $15,000 per person) and can grow tax free at the federal and most state levels. The Tax Cuts and Jobs acts of 2018 made 529’s more flexible by allowing them to also be used for private elementary and high school tuition expenses.

The other popular option is an Education Savings Account, and as the name would suggest, is designed for education savings. The ESA has a contribution limit of just $2,000 per year per account, can grow tax free, and like the 529, can be used to pay for elementary and secondary education expenses.  There are, however, certain eligibility requirements in the year you wish to contribute to the ESA. This type of account is not for everyone.  

In both of these education specific investment vehicles – starting early is key. There are other options, of course, which is where your individual financial situation and preferences comes into play. For some families, contributing real-time, to student loan payments or room and board makes sense. For others, transferring assets to a minor under the Uniform Transfers to Minors Act (UTMA) is an option. Again, unique situations call for individualized financial planning guidance.

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Vector Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. 

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