Gregory S. DuPont
A 529 Might Not Be Your Best Option for College Savings…
The cost of education has gotten so extraordinarily high in the past few decades that the amount of capital parents need to regularly commit to a 529 account is not realistic. The average cost of in-state tuition for public universities has increased by 212% over the past 20 years, with the current average being $11,171 a semester ($89,368 over 4 years). This is well outpacing inflation, which has only increased by 50%, according to the U.S. Bureau of Labor Statistics. Attempting to save for your child’s future education expenses through a 529 could cause a huge distortion in your savings pattern, and likely won’t be as effective as you would have hoped.
The Future of Higher Education
The good news is that the higher education system is likely to change in the future, becoming less expensive and more accessible. With the recent change of administration in Washington, the likelihood of a student loan forgiveness program and/or a free college for all type program to emerge has increased. Some notable components of “The Biden Plan for Education Beyond High School” include providing 2 years of community college tuition-free, making public colleges and universities tuition-free for all students with a family income below $125,000, and cutting payments on income-driven student loan repayment programs in half. There are already plenty states that offer some of their resident’s tuition-free community college including Arkansas, California, Delaware, Hawaii, Indiana, Kentucky, Maryland, Minnesota, Missouri, Montana, New York, Nevada, Oklahoma, Oregon, Rhode Island, Tennessee, and Washington.
Even if the Biden administration does not manage to push a free college plan through, the institutions themselves could become outmoded, in favor of cheaper and more convenient options. During this COVID-era, the public has adapted to going to school online. There’s already plenty low-cost online certifications and training programs out there that are gaining popularity.
College Savings Options
The exponential increase in the cost of education is simply unsustainable, making tying up financial assets in a 529 risky. When it is time for your children to actually receive that money, a different system may be out there that will cover the cost of education. If you have already put a ton of money into a 529 account, and it turns out your child doesn’t need it all, you’ll unfortunately have to pay a penalty to get that money out. Any earnings in your 529 account will also be subject to ordinary income tax rates.
However, just assuming that you child’s education cost will be covered and not saving properly is a dangerous thought. In order to avoid having to stress over paying for college, and having your child suffer the burden that is student loan debt, here are some of our savings recommendations:
- Life Insurance
- With each premium payment you make on a permanent life insurance policy, a portion goes into the death benefit and another is placed into a cash value account. The longer you own the policy, the larger the cash value portion will be, and the smaller amount of your death benefit.
- Life insurance offers more flexibility than a 529 plan. You have the ability to access the cash value for any reason. With a 529 plan, you will typically be taxed an additional 10% on any non-college related withdrawals.
- A life insurance policy has several tax advantages: interest earned on the cash value grows tax deferred, withdrawals made up to the total amount paid in policy premiums are tax-free, and any amount taken as a loan from your cash value, is made tax free.
- Cash value is not included in financial aid calculations, while money put into a 529 plan is considered a parental asset.
- The biggest disadvantage here is the cost of premiums and annual fees. Also keep in mind that cash withdrawals and unpaid loans reduce the value of your death benefit.
- Traditional Brokerage Accounts
- Brokerage accounts are great for saving and growing money over several years.
- Brokerage accounts are more flexible than 529 plans because you can withdraw money at any time and won’t be penalized for it.
- You have the flexibility to invest in just about whatever you want, and however much money you want.
- You will often be taxed at lower capital gains rates.
- The disadvantage here is the lack of tax breaks compared to a 529 plan when the money is used for education.
If you are looking to save for your child’s future education expenses, we recommend doing so through a life insurance policy or a traditional brokerage account. Both offer more flexibility than a 529 plan if your child decides not to attend college, doesn’t end up needing all the money due to scholarships, or if the cost of higher education is lowered by the time they graduate.
We would love to help you and your family build a secure and debt-free future. If you have any questions about saving for college or investing, don’t hesitate to call us at (614) 389-9711.