College Savings

Saving for College

Know your options

by Amy Kanyuk, McDonald and Kanyuk, LLC, Concord

By 2020, the cost of a degree from a four-year private college is expected to exceed $230,000, and a public school degree will set you back about half that amount. To deal with these heart-stopping numbers, you need to develop workable a plan for financing your child’s higher education.

The sooner you start saving, the more funds you’ll accumulate, and the less you’ll need to borrow. The Internet has a wide variety of tuition calculators to help you determine how much you’ll need to save. A good one can be found at www.salliemae.com/save.

This article will explore five popular ways to save: 529 plans, Coverdell savings accounts, “Crummey” trusts, custodial accounts, and savings bonds. No one savings method fits every family, so you should consult with your financial advisor about which ones are best for you, based on your tax bracket, your child’s age, and other factors. Remember, though, that it’s important to balance saving for college with your other financial goals. Your kids can get student loans, but you can’t get a retirement loan.

529 Savings Plans are operated by each state to help families save for future college expenses. You can invest in any state’s plan, so shop around to find which one has the best returns and investment options, and the lowest fees. A good place to find information is www.savingforcollege.com. 529 plans invest contributions in mutual funds and provide a great tax break—any appreciation on the money you invest won’t be taxed by the federal government, or New Hampshire, as long as the money is used for the beneficiary’s higher education expenses, such as tuition, room and board. You can invest in a 529 plan directly through the state’s plan manager, or through a financial advisor. Using a financial advisor will cost more than opening the account directly yourself, but you’ll receive guidance and advice that may make the process of selecting a plan easier. You can retain complete control over the money you contribute; the beneficiary has no right to the assets. You can even change the beneficiary or, with a penalty, reclaim the money for yourself.

529 Prepaid Plans allow you to lock in future tuition costs at state colleges and universities by paying a lump sum or making payments. Most prepaid plans are designed to be used at in-state public schools, and not every state offers a plan (New Hampshire does not). The Independent 529 Plan is the first private college-sponsored prepaid 529 plan, in which about 300 private colleges currently participate. For more information, go to www.independent529plan.org.

Coverdell Education Savings Accounts allow you to contribute up to $2,000 per year per beneficiary, although your income level may affect how much you can contribute. Any appreciation on the money you invest won’t be federally taxed as long as the money is used for the beneficiary’s education expenses. Funds in a Coverdale ESA can be used for elementary and secondary education expenses, as well as college costs. You control the assets and determine how they’re invested, and can change the beneficiary. For more information, go to www.irs.gov, and look for Publication 970.

Crummey trusts are irrevocable trusts set up privately by individuals, and can hold any type of asset. Although Crummey trusts don’t have the tax benefits of 529 plans or Coverdell ESAs, and do require a little more care and feeding, they offer one big advantage over those options – total control over how, when and to whom the trust assets are distributed. Distributions can be made for any reason, not just education expenses. A Crummey trust can have multiple beneficiaries, and the trustee can “sprinkle” distributions among any or all of the beneficiaries in its discretion. This provides flexibility to make distributions in accordance with need. You’ll need a lawyer to set up a Crummey trust, and, since you can’t serve as trustee, you’ll need to find someone to manage the trust, such as a professional trustee or a family member.

Custodial accounts are funded for the benefit of a child. A custodian, usually the parent, manages the assets for the child’s benefit. Custodial accounts, sometimes called UTMA accounts in New Hampshire, can hold any type of asset, but can have only one beneficiary. Although custodial accounts are very simple to set up at a bank or brokerage, they have two major disadvantages over the other options – they may limit the amount of financial aid available to the child, and the child must receive all of the assets outright when he reaches the age of 18 or 21, depending on the state (in New Hampshire, it’s 21).

United States Savings Bonds provide a low-risk way to way to save for college, since the bonds are backed by the federal government. Interest earned on Series EE and I bonds is federal and state tax-free when the bonds are redeemed to pay for qualified education expenses, as long as your income doesn’t exceed certain limits. You also may be able to roll Series EE and I bonds into a 529 plan. For more information, visit www.treasurydirect.gov.

In today’s economy, saving for college may be challenging. But if higher education is a priority for your family, finding ways to put some money away regularly, starting when your kids are young, will make a big difference down the road.