How to Plan Ahead for College Expenses: From 529 Plans to Custodial accounts

The cost of college tuition continues to rise each year. In fact, tuition rates at private universities across America increased an average of 5% over the past two academic years. At public universities, in-state tuition increased an average of nearly 4%.¹ Even with scholarships, the average four-year college degree costs thousands of dollars. Whether you are a parent or grandparent thinking about a child’s educational future or a student trying to minimize debt, planning to save for college is as important as selecting a degree. Below, our team has put together some helpful tips to consider when strategizing about educational savings.

First and foremost, it’s important to remember that college expenses are not strictly limited to tuition costs. There are also fees, which can vary per course and per degree. Business and nursing degrees, for example, often cost more per credit hour or have higher associated fees. These can differ depending on the university, so researching intended programs is critical to determining which will be the most cost-effective. If the student plans to live on campus, housing fees should also be considered. These can vary depending on the city, on-campus or off-campus housing, and the number of roommates. Books and supplies are an additional cost; often, required textbooks can run several hundred dollars for just one class. Most universities recommend planning for an additional ten to fifteen thousand dollars per year on top of the tuition costs.  

This can seem very daunting. However, the earlier you start, the better off you will be. Starting early allows you to take advantage of compound interest, meaning your savings will generate earnings in addition to the contributions you make. We recommend making regular contributions, no matter how small. Even $50 per month adds up, and with compound interest, you can work towards your goal more quickly.

The most critical part of this process is choosing the right savings account for you. There are numerous options: 529 plans, prepaid tuition options, ESAs, UTMA or UGMA accounts, and even standard high-yield savings accounts. These all have pros and cons, ranging from tax benefits to varying guarantees of returns. A qualified financial adviser, like our team members here at GDS, can help you determine which option will provide you with the most value.  

529 plans are well-known for their tax benefits. Earnings are not taxed upon withdrawal, provided they are used for qualified educational expenses (including up to $10,000 per year for elementary and secondary schools). More than 30 states offer additional tax benefits for 529 accounts.

Prepaid tuition is an option through 529 accounts and some universities. This allows you to lock in current tuition rates for future education. This not only lowers the overall cost of college but can also reduce the need for future student loans. These funds must be used at specific institutions, however, making them a less flexible option.

ESAs, or Education Savings Accounts, offer additional investment options and do not cap tax-free withdrawals for elementary and secondary schools, like 529 plans do. However, ESAs are limited by annual income and have a lower limit on contributions.

Custodial accounts, such as UTMAs and UGMAs, can be attractive options because there is no penalty if these funds are not used for educational expenses. If your loved one opts out of college, there will be no monetary consequence – the funds are turned over to them regardless. There are far fewer tax benefits, though.  

While saving and finding the right savings account is important, it is just one piece of the college puzzle. Scholarships and grants can tremendously reduce overall expenses and can lower the amount you need to save. Start researching these options early to find the options your student is most qualified for – whether those are merit-based, need-based, or based on other criteria.

Finally, talk to your university. There are often creative solutions that require a little bit of initiative but can save a great deal of money. Becoming a Resident Assistant, for example, usually means that a student will receive free housing in exchange for their work. Other on-campus jobs also have a variety of perks – it never hurts to ask what options are available.

If you’re ready to start saving for college expenses, reach out to us today. Our team can help take the guesswork out of planning. We are here to provide a personalized plan that is tailored to your individual needs, incorporating your specific timeframe, budget, and risk tolerance with thoughtful diversification and portfolio management. Contact our office at (469) 212-8072 or visit www.gdswealth.com to learn more.

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¹ U.S. News & World Report, 2023.