No longer are student loans just an issue for the younger generation! From 2012 to 2017, the grand total of student loan borrowers over age 60 climbed by 20%. And right now, there are 2.4million borrowers over the age of 62 carrying a total of $98 billion in student loan debt.
A general principle is to retire with no debt. Carrying student loan payments into retirement isn’t optimal, so think about the steps you can take while your children and grandchildren are young to help them financially in their quest for higher education.
How Parents Can Save for College Expenses
The average cost of college tuition ranges anywhere from $11,631 for in-state public colleges to $43,775 for private schools. The good news is you can start saving today to help cover some or all of the expenses by the time you have a high school graduate. There are two main savings vehicles for college expenses: A 529 Plan or Educational Savings Account.
529 Plans are investment accounts that can be used to pay for qualified education expenses for a designated beneficiary. There are no contribution limits for 529 plans, and they can be used to pay for college or K-12 tuition, apprenticeship programs, student loan repayments and education-related expenses like books, meal plans and computers. 529 Plans do offer tax benefits. The money contributed to the account grows tax-free, and you will not be taxed when the money is withdrawn to pay for educational expenses. Keep in mind that non-qualified withdrawals for non-educational expenses are subject to income tax and an additional 10%penalty tax. Several states offer 529 plans, and you can choose a plan outside of the state you reside in. Note the amount saved in a 529 Plan will be considered parental assets and impact the Expected Family Contribution calculation, potentially decreasing your child’s financial aid award.
Educational Savings Accounts
Educational Savings Accounts(ESAs) are trust or custodial accounts that allow you to save and grow your money for educational purposes. They are very similar to 529 Plans with two key differences. You can only contribute up to $2,000 per child per year to an ESA. You can also choose the type of investment for your ESA like stocks, bonds and mutual funds. The investment options allow you to have more control over the potential rate of return as you work to reach your college savings goals. Similar to 529 plans, contributions to ESAs grow tax-free and are withdrawn tax-free for educational expenses. Remember the beneficiary of the ESA will have to pay taxes on any non-qualified withdrawals.
How Grandparents Can Save for College Expenses
529 plans are also a popular tool for grandparents helping their grandchildren pay for their higher education. But the trick is not to list the student’s name as the beneficiary. You can list yourself or spouse as the beneficiary, then change the beneficiary to your grandchild when they are a junior or senior in college to help cover expenses and repayment. This will help when it comes time to file for financial aid. FAFSA doesn’t ask for information on grandparents’ assets, meaning it won’t impact the Expected Family Contribution calculation. However, the withdrawals from the account will be counted as student income on FAFSA when filing the next year and could potentially lower their financial aid award.
You could also consider getting a cash-value life insurance policy. It won’t be included in the Expected Family Contribution calculation. There are several withdrawal options including a withdrawal of cash value when you don’t intend on paying the money back. The death benefit on the policy will be reduced with this method of withdrawal. Make sure you understand the tax implications of opening or withdrawing from a cash-value life insurance policy. This method of saving requires you to start early to give the policy plenty of time to accumulate money.
For many people we work with at Asset Preservation Wealth & Tax, helping their families is one of their main goals. Whether funding higher education or dividing up assets, you’ll want to work with a financial professional who can look holistically at your financial plan and offer customized solutions to help you achieve your goals.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.