School’s Out for Summer … But Tuition Is Back in the Fall

I can only imagine the enthusiasm of students and teachers who will finally able to be back in a classroom and learning in person as schools and campuses around the country start coming back to life this fall. As I walked around my neighborhood every morning earlier this spring, front lawns were dotted with signs pronouncing “Congratulations, graduate!” for kindergartners, fifth-graders, high school seniors, college grads and every grade in between as families celebrated these important milestones.

The experience of the pandemic has reminded us just how important and irreplaceable educational experiences are for our future generations. For those thinking about giving the gift of education to a young loved one, there’s never been a more meaningful time.

There are a few ways to make a gift that can be used for education, each with its own set of features you should evaluate thoroughly before deciding upon the right vehicle to use.

The Education-Specific Option

If you want to ensure your gift is used strictly for education, there are two common ways to do so. The first and most straightforward way is to directly pay for the student’s education by writing a check for their tuition payable to their educational institution. Paying for tuition in this way is an efficient way to give, as this type of support does not count toward your annual gift tax exclusion amount ($15,000 per person in 2021) or your lifetime exemption amount ($11.7 million per person) as long as the check is made payable directly to the education institution.

While writing a check is an easy way to pay for tuition due, many parents or family members start thinking about how to save for future college costs as soon as the future college student is born. One of the most popular methods to save for future educational expenses is the 529 savings plan. A 529 savings plan is a tax-advantaged account that can be used to pay for qualified education costs. Once a 529 savings plan is opened, anyone can contribute to it on behalf of a beneficiary.

While there is no federal income tax deduction for making a contribution to a 529 savings plan, some states do offer a state income tax deduction for contributions made by a resident to their state plan. The account, once invested, grows tax-deferred each year until the student goes to college. Withdrawals from the account are tax-free as long as funds are used to pay for qualified educational expenses. (The important word here is “qualified,” as some costs, such as application fees or transportation costs, do not fall into the qualified category.) Some examples of qualified education costs include:

  • Tuition and fees for a single college or university
  • College room and board, books and supplies, computers and internet access
  • Registered apprenticeship program expenses
  • Tuition and fees for K-12 schools up to $10,000 per year
  • Up to $10,000 in student loan debt repayment

Keep in mind, however, that if the funds are withdrawn for a reason other than the educational uses noted above, income taxes and a 10% penalty will apply to the growth in the account.

Since a 529 plan account is generally established for the benefit of another person, any money you contribute counts as a gift to that person, so your contribution is a great way to utilize your annual gift tax exclusion amount. You can give the full $15,000 each year to a single beneficiary, or $30,000 if you are married and your spouse also contributes. You could also take advantage of a special rule and do a lump sum contribution by accelerating up to five years of your annual gifts all at once — $75,000 if you are single or $150,000 if you are married. A lump sum investment of $150,000 to a 529 savings plan when a child is born would be worth more than $350,000 by the time they turn 18 if the account compounds at 5% each year.

Some families worry about overfunding a 529 account for their child or loved one. If your loved one doesn’t go to college or college ends up costing less than you originally anticipated, one of the great features of a 529 plan is that you can change the beneficiary on the plan to another family member of the original beneficiary. Parents can change the beneficiary to another child, a cousin or even themselves!

A 529 prepaid tuition plan is another way to pay for college, though not quite as common as the more traditional 529 savings plan described above. With a prepaid tuition plan, you prepay future costs at a specific college or university, locking in future tuition costs today regardless of how many years are left until actual enrollment. 

The More Flexible Option

There are other ways to financially support a loved one’s education without putting money directly toward tuition costs. Trusts and custodial accounts are a great way to build in flexibility.

By setting up a trust, the trustee can specify what they want the money to be used for, all of which would be clearly laid out in the terms of the trust. For example, you may specify that it be for education-related expenses, such as housing, meals, transportation, internships or textbooks. The trustee may also specify when the money can be accessed by using an age limit or creating terms for the money to be distributed over a specific period of time, for example. For those making the gifts, trusts offer greater customization and flexibility than a 529 savings plan offers. However, trusts do come with higher legal costs to set up and administer as well as less favorable tax treatment, as trusts do not provide tax-free growth or distributions like 529 savings plans do.

A custodial account offers a similar structure to trusts, though they’re easier and less costly to establish. Unlike trusts, however, once the beneficiary reaches the age of majority, the account becomes theirs. They will be able to take control of the account and use the remaining funds for whatever purpose they like – whether it is next semester’s tuition and books or the new car they have their eye on.

Similar to 529 plans, contributions to both trusts and custodial accounts for the benefit of another person count as a gift to that person, so you will need to file a gift tax return. If you are considering using a trust or custodial account, the beneficiary may be subject to Kiddie Tax rules, so take this into consideration when evaluating your options.

The gift of education, no matter how big or small, will make a lasting difference in a loved one’s life. Ultimately, however you decide to make this gift, know that there isn’t a wrong way to do it!

Senior Wealth Adviser, Boston Private

Kathleen Kenealy, CFP®, CPWA® is the Director of Financial Planning and a senior wealth adviser for Boston Private. She specializes in working with successful individuals and families to manage, protect and grow their assets. Kenealy provides guidance on investment, retirement, philanthropic, estate and tax-planning strategies.


How to Help Your Kid with FAFSA, Student Loans, and More!

It’s easy to assume that the role of a parent diminishes as a child approaches high school graduation. This is when many parents choose to step back and allow their kids to become the primary decision-makers in their own lives. 

But the time between high school and college is more than just a symbolic transition from childhood to adulthood – it’s a period of life-changing and complicated decisions. How your child navigates the questions of school choice, financial aid and student loan debt will have a major impact on not just their college years, but the trajectory of their entire adult life.  

You can’t make those choices for them, but you can help guide them through the process. Here’s how to do it. 

Apply for the FAFSA Together

The Free Application for Federal Student Aid (FAFSA) is the form that determines how much financial aid a student can receive. The federal government uses the FAFSA to calculate a family’s expected financial contribution and then decides how much the student should receive in federal grants and scholarships. 

Universities also use the FAFSA to assign their own financial aid, both need-based and merit-based. Families can apply for the FAFSA starting October 1, and it’s best to apply as soon as possible.  

Keep your child in the loop with the FAFSA so they understand how the process works. Explain why you can’t afford to pay for the entire tuition bill and how they’ll need to find outside funding. 

Parents have to fill out the FAFSA every year to account for any changes in income and family size. If you suspect your financial situation will affect your child’s FAFSA results, let them know as soon as possible. 

Explain Federal and Private Student Loans

There are two types of student loans, federal and private. Federal loans are backed by the Department of Education and have a variety of income-based repayment options for struggling students. Parents fill out the FAFSA to determine student loan eligibility. 

Private loans have higher interest rates and are less likely to have income-based repayment options. If your child loses his or her job after college and can’t afford payments, the private lender is unlikely to work with them. They’ll have more repayment options with federal loans. 

Most students borrow private loans after they reach the limit for federal student loans. Parents often have to cosign private loans, because the lender needs an adult with a solid credit score and stable income to provide assurance that the loan won’t default. 

Parents and students can both take out federal loans to pay for a college education. The government has a special Parent PLUS loan program which allows parents to borrow the difference between the attendance cost and any other financial aid their child qualifies for. 

If you’re going to take out a student loan for your child, decide early on who will be responsible for paying it back. Will you ask your child to take over payments after graduation, or will you handle them yourself? If you take out a loan in your name, your child won’t have any legal obligation to pay them back.  

Encourage Your Child to Apply for Scholarships

When I reached the second semester of my senior year in high school, all my motivation went out the window. I was ready to graduate and start my new life. I had already been accepted to college and had a decent financial aid package. I spent my free time watching movies and dreaming about how to decorate my dorm. 

My parents and college counselor encouraged me to apply for scholarships, but my senioritis was too strong. The bulk of my financial aid was already accounted for, and I didn’t want to spend hours working on an application for a $500 scholarship.  

It wasn’t until I started paying back my student loans that I realized what a big difference all those little scholarships could have made. I was only earning $1,750 a month after taxes, so all of a sudden $500 seemed like a big deal. 

Encourage your child to apply for as many scholarships as possible – even the ones that seem like a long shot. Remind them to keep applying even after they start college. I got a few scholarships as an upperclassman that reduced my loan burden. 

Help Them Understand their Student Loans

When I was in high school, I applied to both public and private colleges, including ones I knew I couldn’t afford. My parents made it clear that borrowing $100,000 to get a journalism degree wasn’t a wise choice, so I made my final choice partly based on affordability. Even then, I didn’t understand the impact student loan debt would have on my life. 

When I graduated college with $24,000 in student loans, it took me five months to find a full-time job. I eventually landed a gig as a newspaper reporter making $28,000 a year, and shortly after that my first student loan payment arrived. The payment was $350 and I was making $1,750 a month after taxes, so 20% of my take-home pay was going to student loans. 

This was a hard reality for me to accept. I had been so responsible, choosing an affordable college and not borrowing more than I thought I could pay back – so how was my debt burden still so high? 

I was able to scrape by and make the payments, but I didn’t have much left over for discretionary spending. Most of my weekend nights were spent in my cheap apartment watching Netflix, and a candy bar from the nearby gas station was the fanciest luxury I could afford. 

Give your child a mock budget to show how student loans will affect their life after college. I wish I had understood how my loans would affect my ability to travel, pay for car repairs or splurge every once in a while. Show them how choosing a more affordable school will provide more options after graduation. Even if they still choose to take on significant student loan debt, they’ll do so with a full understanding of the consequences. 

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