This is such an exciting time of the year as students go back to school and either begin or continue their pursuit of higher education. That journey often opens doors or introduces young professionals to new connections and opportunities that can change the course of their lives forever; however, it comes at a great cost. The average student spends $26,027 over one year at a public university, possibly necessitating a comprehensive strategy to pay for things like tuition, living, books, meals and more for a four-year degree [1]. Let’s go over a few avenues you can explore when looking to save for college for yourself, your children or your grandchildren.
529 Plans [2,3]
529 plans are popular savings vehicles that offer tax advantages to those looking to fund postsecondary education. Though rules can vary on a state-to-state basis, 529 plans are typically funded by post-tax dollars then grow tax-deferred. Withdrawals can then be made tax-free if they’re used for qualifying expenses. They can, however, be subject to federal and state income taxation if they are used for other expenses.
Another attractive feature of 529 plans is the high contribution limit. There are no annual limits, and the total amount you can contribute can range from $235,000 to $525,000 depending on your state of residence. The account then functions similar to a Roth 401(k) or Roth IRA by investing contributions into mutual funds, ETFs and other market investments. Additionally, money in a grandparent-owned 529 account does not figure into how much federal aid a student may qualify for, potentially making them advantageous for grandparents looking to help their grandchildren.
UGMA and UTMA [4,5]
Though minors do not have the right to contract, meaning they can’t own stocks, bonds, mutual funds or insurance products, they can be the beneficiaries of a custodial account. The minor does not technically control the account, but through an UGMA account, or a Uniform Gift to Minors Act account, they are able to own the assets contained within. An UTMA account, or a Uniform Transfer to Minors Act, is similar in that it can contain securities, but it can also contain physical property and assets like real estate, collectibles and more.
Traditionally created by banks, UGMAs and UTGAs are controlled by a custodian with a fiduciary duty to act in the best interest of the beneficiary. Then, once the minor reaches the age of trust termination, they are granted access to the account’s contents. Unlike income from 529 plans, income from custodial accounts must be reported on the beneficiary’s tax return, meaning that they will likely not receive the same tax advantages of a 529 plan. Additionally, funds do count when calculating qualification for federal loans, and they could prevent a student from qualifying for need-based assistance.
Cash Value Life Insurance
A cash value life insurance policy is a permanent life insurance policy with a cash value component that can grow at a rate guaranteed by the issuing insurance company. One popular type of cash value life insurance that can be used to fund tuition is an indexed universal life insurance policy. This type of policy comes with no contribution limits and provides growth linked to a predetermined index. That cash value is also protected by the claims-paying ability of the issuing insurance company, meaning that it is not subject to market risk the same way the funds of a 529 plan would be.
Once the cash value is built, it can be borrowed from tax-free for any reason. Though it is often used for retirement income, it can be used by students to pay for tuition. Interest is charged on the loan; however, the indexed universal life policy provides uninterrupted growth, meaning the policyholder has the potential to out-earn interest charges with credited growth. Another distinct advantage of a cash value life insurance policy is that loans from the cash value do not count when determining how much federal aid a student qualifies for, meaning they will not be adversely affected when looking for scholarships, grants or federal loans.
Sources:
1. https://educationdata.org/average-cost-of-college
2. https://www.investopedia.com/terms/1/529plan.asp
3. https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan
4. https://finaid.org/savings/ugma/
5. https://www.investopedia.com/what-is-an-utma-ugma-529-plan-and-do-you-want-one-5075913
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”). Securities offered by Registered Representatives through Private Client Services, Member FINRA/SIPC. PCIA and Private Client Services are separate entities and are not affiliated.
This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment or any change to your retirement plan. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.
