What is the Right Formula for Funding Education?

August 10, 2016

Education is truly an investment for a lifetime.  The gift of a college education can open the door to a world of opportunity for your child or grandchild.  Saving, even a little at a time, can make a big difference down the road.  With the cost of a college education continuing to increase, the key is to start saving early and regularly. There are many different methods to fund education expenses.  Determining the best method for your family should first start with an honest conversation regarding your goals.  At HFG Wealth Management, we utilize the life planning approach; our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values.

Ask yourself:

  1. How much of my children’s or grandchildren’s education do I want to fund?
  2. What is a feasible savings amount based on my financial situation?
  3. Which other funding methods (i.e. scholarships, work-study, student loans, financial aid) are likely to play a part in funding education?

Once these key questions are answered, a plan can be implemented to fund education.  I have provided some helpful information on the various education funding methods that you may want to use to begin the planning process:

529 Plans 

529 plans are one of the most popular tax-advantaged college savings options.  They include both college savings plans and prepaid tuition plans.  With either type of plan, your contributions grow tax deferred and earnings are tax free at the federal level if the money is used for qualified college expenses.  Each state may also offer their own tax advantages.  With a college savings plan, you open an individual investment account and select one or more of the plan’s mutual fund portfolios for your contributions.  With a prepaid tuition plan, you can purchase tuition credits at today’s prices for use at specific colleges in the future and there’s no individual investment component.  With either type of plan, participation isn’t restricted by income, and the lifetime contribution limits are high, especially for college savings plans.

Coverdell Education Savings Accounts 

A Coverdell education savings account is a tax-advantaged education savings vehicle that lets you contribute up to $2,000 per year.  Your contributions grow tax deferred and earnings are tax free at the federal level (and most states follow the federal tax treatment) if the money is used for the    beneficiary’s qualified elementary, secondary or college expenses.  You have complete control over the investments you hold in the account, but there are income restrictions on who can participate.

U.S. Savings Bonds 

The interest earned on Series EE and Series I saving bonds is exempt from federal income tax if the bond proceeds are used for qualified college expenses.  These bonds earn a guaranteed, modest rate     of return, and they are easily purchased at most financial institutions or online at www.treasurydirect.gov.  However, to qualify for tax-free interest, you must meet income limits and other established criteria.        

UTMA/UGMA Custodial Account

An UTMA/UGMA custodial account is a way for your child to hold assets in his or her own name with you (or another individual) acting as custodian.  Assets in the account can then be used to pay for college.  All contributions to the account are irrevocable, and your child will gain control of the account when he or she turns 21 (varies state to state).  Earnings and capital gains generated by assets in the account are taxed to the child each year.  Under the kiddie tax rules, for children under age 19 and for full-time students under age 24 who don’t earn more than one-half of their support, the first $1,050 of earned income is tax free, the next $1,050 is taxed at the child’s rate and anything over $2,100 is taxed at your rate.

Financial Aid

Many families rely on some form of financial aid to pay for college.   Loans and work-study jobs must be repaid (either through monetary or work obligations), while grants and scholarships do not.  Most financial aid is based on need, which the federal government and colleges determine primarily by your   income, but also by your assets and personal information reported on your aid applications.  In recent years, merit aid has been making a comeback, so this can be really good news if your child has a special talent or skill.

It is most likely a combination of the education funding methods above will be utilized in order to meet your own family’s education goals.  We recommend custom tailoring an education funding plan based on your family’s needs.  Additionally, the plan should be reviewed on a periodic basis and adjustments made accordingly.

At HFG Wealth Management, we embrace a more holistic method of financial planning known as Financial Life Planning™.  We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan.  As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values.  At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future.  We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage.  For more information, please visit www.hfgwm.com or call 832.585.0110




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Copyright © 2019. HFG Wealth Management, LLC. Investment advisory services offered through HFG Wealth Management, LLC – An independent Registered Investment Advisory firm registered with the SEC. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Therefore, any information presented here should only be relied upon when coordinated with individual professional advice. [ more disclosures ]