For most parents, saving for children’s college education is a major financial commitment. A savings program is a good start, but merely accumulating funds is usually not enough. The type of assets in the education accounts, and whether the parent or the child owns them, can significantly impact the family’s eligibility for financial aid.
Several tax benefits are available to help families pay for college. Some, like the various education tax credits, the exclusion of interest income from qualified U.S. Savings Bonds, and the deduction for interest expense on qualified educational loans, are phased out as income increases. However, if the benefit is phased out for the parent, the student often can pay a portion of the educational expenses to take advantage of some of these benefits, provided the student has a tax liability.
Qualified Tuition Programs
Qualified tuition programs (QTPs), or 529 Plans, have become increasingly popular, and the tax benefits are valuable. These programs enable a person to prepay tuition costs for a beneficiary or contribute to an education savings account established to pay for a beneficiary’s elementary, secondary and higher education expenses, certain apprenticeship programs, and even up to $10,000 of student loan debt.
Education Savings Accounts
Education Savings Accounts (ESAs) are another savings vehicle to consider. Up to $2,000 per year can be contributed to each beneficiary’s ESA. If the ESA distributions are used to pay for certain educational expenses, they are tax-free. Thus, starting an ESA when a child is very young allows several years of tax-free growth. The ability to contribute to an ESA is also phased out as income rises, but it is possible to avoid this limitation by transferring funds to a child who can fund his or her own ESA.
Some families also consider borrowing money to fund college expenses. There are many different sources of borrowing, such as home equity loans, loans from retirement plans, and federal student loans. The tax and economic effects of each type of loan should be evaluated in light of the borrower’s circumstances.
We recommend you consult with your tax and wealth advisors to ascertain which education funding option is most appropriate for your unique situation.
Alyssa Yocom is an Associate Wealth Manager with Schultz Financial Group Inc.
Schultz Financial Group Inc. (SFG) is a wealth management firm located in Reno, NV. Our approach to wealth management is different from many other wealth managers, financial advisors, and financial planners. Our team of fee-only fiduciaries strives to help our clients build their wealth across four capitals: Financial Matters, Physical Well-being, Psychological Space, and Intellectual Engagement. We provide family office and wealth management services to clients located in Nevada, California, and other states. If you’d like more information, please check out our website or reach out to us via our contact page.