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How to Pay for Your Child’s College With These Plans

Back in the day, tuition was something that often could be paid for painting fences, mowing lawns, and babysitting over the summer. Now, private tuition is quickly catching up with the mean American income, and many families are forced to make tough decisions – help the kids pay for college or let them take on high-interest debt and begin their careers with dead financial weights tied to their feet. 

As financial advisors, we don’t want Americans to be saddled with years of debt—we want to see them flourish financially. That means beginning the investment journey as soon as possible with as little debt as possible. As a parent, you can dramatically help your children pay for tuition via various investment accounts and financial products ideally suited to paying for burgeoning college costs.

How Much Does College Cost In 2024?

We’ll have to talk about averages here because they vary quite a bit between universities, but they’ll paint us a good picture of what to expect. According to US News, the average private college tuition for the 2023/2024 academic year is $42,164 (College Board has a significantly higher figure of about $56,000), and the average public out-of-state tuition is $23,630. Average in-state tuition will give you a sigh of relief – ‘only’ $10,662. 

What’s the average American income? Around $59,384 in 2023. You may be starting to sweat if you have multiple children planning on attending high-end private universities! 

Of course, many students will qualify for grants, scholarships, and tuition waivers, but not all. If you want to help your children avoid going into debt as soon as they attain adulthood, you can use one or a mixture of the accounts and financial products discussed here to accelerate your savings abilities in a tax-efficient manner.

The 529 College Savings Plan

Nearly every state (sorry, Wyomingians) offers a 529 College Savings Plan. It’s similar to an IRA or 401(K) – you make post-federal-tax contributions and purchase the investments available to you that align with your risk appetite and goals. Your investments then grow on a tax-deferred basis. When your child reaches college age, you then withdraw your original contributions and earnings to pay for qualified college expenses. 

Some states allow you to deduct your contributions at the state level, reducing your local tax burden. Additionally, you can change beneficiaries as you see fit, so if one child ends up not going to college, or has leftover funds, you can switch the beneficiary to your other child or relative, such as a niece or nephew.  

Qualified education expenses include:

  • Tuition and fees (up to the full amount for college or vocational school, but limited to $10,000 per year for K-12) 
  • Books and supplies 
  • Computers, software, and internet access 
  • Room and board (if the student is enrolled at least half-time)
  • Special needs equipment (if required for the student to attend or enroll in a college or vocational school)
  • Student Loans (up to a $10,000 lifetime limit) 

Unlike an IRA or 401(K), there are no limits on how much you can contribute to a 529 plan, though states may have their own contribution limits. However, you shouldn’t think you can contribute $100,000 a year into a 529 plan without coming to Uncle Sam’s attention, as they do count toward your annual and lifetime gift tax exemption limit. 

Gift tax exclusion limits for 2024:

  • Annual exclusion per recipient: $18,000
  • Lifetime exemption: $13.61 million

There’s one more important nuance you should know – 529 Superfunding. The 529 plan superfunding rule allows you to make a lump-sum contribution equal to five years’ worth of annual gift tax exclusions in a single year without incurring gift taxes. In 2024, with the annual gift tax exclusion at 

18000, you can contribute up to 90,000 ($18,000 * 5) per beneficiary without owing any gift tax.

However, by using this superfunding strategy, you must elect to treat the contribution as if it were made over a five-year period. This means you cannot make any additional tax-free gifts to the same beneficiary during those five years without using a portion of your lifetime gift tax exemption.

529 Pre-Paid Tuitions 

Do you think tuition will continue to get more expensive? If so (and that’s probably a safe assumption), you may want to consider ‘locking in’ current tuition prices via a 529 Pre-Paid Tuition plan. You accomplish this by purchasing ‘units’. The plan administrator invests the funds on your behalf, with the intention of your invested funds keeping pace with tuition inflation. When your child begins tuition, your funds are used to pay for tuition and expenses. However, there is a chance that your funds won’t keep pace with the cost of tuition, which could result in the plan covering only a portion of the tuition expenses.

The Coverdell Education Savings Account

Earlier known as an Education IRA, the Coverdell Education Savings Account works quite similarly to a 529 plan – you make your contributions, purchase your investments, and enjoy tax-deferred growth and distributions as long as you follow the rules. However, the Coverdell is simultaneously more limiting and more flexible than 529 plans. 

Firstly, let’s talk about their advantages. With Coverdell funds, you have greater freedom to cover education-related expenses, including K-12 expenses such as laptops, tutoring, and supplies that a 529 plan typically wouldn’t cover. You may also find greater freedom in your investment choices, as they are generally self-directed. This lets you potentially keep costs lower than your investments in 529 plans, which may consist of expensive funds. 

Now for the downsides. The beneficiary typically must remove all funds by reaching 30, and unlike 529 plans, they don’t allow for direct Roth rollovers (which were recently permitted in January 2024).

Contribution limits are notably lower as well. You can contribute up to $2,000 per year per beneficiary into a Coverdell ESA, and you can’t deduct those contributions from your state tax burden like you can with some 529 plans.

Finally, high-earners may not qualify to contribute to a Coverdell ESA or may face phased-out contributions.

In 2024, Coverdell ESA Income limits are as follows: 

For single taxpayers:

  • AGI below $95,000: Eligible to contribute up to the annual limit
  • MAGI between 95,000 and \110,000: Partial contributions allowed
  • MAGI above $110,000: No contributions allowed

For married taxpayers filing jointly:

  • AGI below $190,000: Eligible to contribute up to the annual limit
  • MAGI between 190,000 and \220,000: Partial contributions allowed
  • MAGI above $220,000: No contributions allowed

One issue with these savings methods is that they’re unreliable, as they depend on the stock market for growth. You may want to shore up your college savings strategy via other sources.

Education Savings Bonds

You can earn tax-free interest via Series EE and I savings bonds if used for qualified educational expenses at eligible institutions. One nice thing about these bonds is that they’re much less risky than stocks and bonds not issued by the US government. Like always, though, they come with rules. There’s a one-year holding period, and you’ll face penalties if you cash out within five years. 

Unfortunately, current Series EE rates aren’t too hot – about 2.7% as of April 2024, meaning they’re probably not keeping pace with inflation. I Bonds are faring better, as those issued from November 2023 through April 2024 have a composite rate of 5.27%.

Bonds often deserve a spot in long-term investment portfolios portfolio due to their stability and security. But do they deserve a spot in your college savings portfolio? A financial advisor can help you make that decision.

Will Investing Help You Pay Your Child’s Tuition?

Consistently tucking away $2,000 a year for 18 years with a 10.00% rate of return (about the historical average of the S&P 500) will yield you about $91,000. Combined with grants and other scholarships, that may be enough for a four year degree, especially if your child goes to an in-state public school. If your child wants to attend a private, higher-end university and doesn’t qualify for any grants or scholarships, you may need to have a more aggressive savings strategy using a 529 plan or other savings account.

Keep in mind that a 10% rate of return is not guaranteed. You may even lose money in a college savings account, or your performance may be insufficient to save enough for college within your timeframe. On the other hand, a savings plan may give your savings the boost they need to remove a significant financial burden from your or your children’s shoulders.

Final Thoughts

College is getting more and more expensive. Besides tuition, the rising prices of auxiliary expenses like textbooks, parking, and room and board are making college unaffordable for many, especially for those who didn’t begin planning early enough. There are plenty of tools that make it easier for Americans to save for college; you just have to be aware of their existence and then take the leap to start utilizing them. 

If you’d like to learn how we can help you start on the right path to college savings, feel free to click the button below for a no-obligation consultation.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The scenario mentioned in this presentation is not an actual client experience. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this presentation.

About the Authors

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

  • Jose Joia

    Jose M. Joia is a Wealth Advisor at Walters Strategic Advisors, LLC. As a member of the team, Jose’s responsibilities involve comprehensive wealth management, planning and customer service. He has over 6 years of industry experience specializing in planning and solving unique issues his clients encounter. Jose has experience serving individual clients, business owners and non-profit organizations.