The cost of college is rising on a fast and continual basis. According to data from U.S. News and World Report1, the average cost for tuition and fees for the 2023-2024 school year are at:
- Private colleges and universities: $42,162
- Out-of-state students at public universities: $23,630
- In-state students at public universities: $10,662
Note this includes tuition only. When you add in room and board, books and other costs the total would exceed $90,000 at the most expensive elite private universities this school year.1
Financial aid and scholarships can help to mitigate these costs if your child qualifies, but you should not count on this. Here are some smart investing ideas to plan for your children’s college and higher education expenses.
529 Plans
A 529 plan is a tax-advantaged college savings plan offered by all 50 states. These plans were originally limited to paying for college costs, but recent legislation has expanded allowable uses to include K-12 costs in some cases as well as apprenticeship programs and trade schools.
There are two main types of 529 plans:
- Education savings accounts allow for tax-free withdrawals for qualified educational expenses.
- Prepaid tuition plans allow the account beneficiary to lock in current tuition rates at specified universities. These plans often result in the student paying a lower rate for tuition than the current rate at the time they attend.
Qualified educational expenses generally include costs like tuition, room and board, books, fees and related costs. The Secure Act followed by Secure 2.0 allows money left in a 529 account to be used to pay off student debt both by the account beneficiary and certain family members. Additionally, up to $35,000 can be transferred to a Roth IRA in the name of the beneficiary as well.
Custodial Accounts
A custodial account allows a parent or other adult to gift money to an account established for a minor beneficiary. Uniform Gift to Minors Act (UGMA) accounts were the original type of custodial account, this was followed by the Uniform Transfer to Minors Act (UTMA).
These accounts are normally opened at a bank or brokerage firm and can be invested in a full range of financial investments such as stocks, bonds, mutual funds, ETFs and others. UTMA accounts, which have largely superseded UGMA accounts across the country, allow for investments in real assets such as real estate as well.
A custodial account reverts to the control of the minor beneficiary once they reach the age of majority. Any gifts to the custodial account are irrevocable, meaning the adult donor cannot reverse the gift once it has been made. Custodial accounts can be used for college costs, but can also be used for just about any other type of expense as long as the expense is made for the benefit of the minor beneficiary.
Custodial accounts allow for a wider range of investments than a 529 plan, but investments in a custodial account can limit the minor beneficiary’s access to financial aid in some cases, and can have tax consequences for the minor and/or the parents as well.
Roth IRAs
Contributions to a Roth IRA can be withdrawn at any time tax-free and this money can be used to fund college expenses. This applies to a Roth IRA owned by a parent or the child.
In the case of a child, if they have earned income from a part-time job they can contribute up to the annual contribution or the amount of their earned income, whichever is lower. The amount of their contributions can be withdrawn to use for college expenses while leaving the money from any investment earnings in the account to continue to grow tax-free.
A nice thing about a Roth IRA is that the account holder will have a wide range of potential investments to choose from.
Withdrawal of money attributable to account earnings prior to age 59 ½ would be subject to a penalty and most likely to taxes so it is important to only withdraw money that is attributable to contributions to the account.
CDs and Savings Bonds
CDs are ensured savings vehicles offered by banks, credit unions and many brokerage firms. They run for a set term of a few months out to ten years in some cases. These accounts are federally insured and can be a good option with today’s interest rates. Note there is a penalty for early withdrawals.
Savings bonds are offered through the U.S. Treasury. Series EE and I bonds are both solid options. EE bonds are guaranteed to double in value within 20 years. I bonds are designed to protect against inflation and currently offer a very attractive rate. Both types of bonds are guaranteed by the U.S. government, and you can start with an investment of as little as $25.
Get an Early Start
Whether you use one of these options or another savings vehicle including just a regular investing account, your best bet is to start early and put away money for your child’s education on a regular basis. We must assume that college costs will keep rising, so a longer investing horizon helps.
Talk to your Wedbush financial advisor about the best ways to save for your child’s education.
1Nasdaq: https://www.nasdaq.com/articles/how-much-does-it-cost-to-attend-one-of-2024s-best-colleges
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Securities and Investment Advisory services offered through Wedbush Securities, Inc. Member NYSE / FINRA / SIPC.
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These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Investment products involve investment risks including potential loss and are not insured by any federal agency, are not deposits or obligations of, or guaranteed by any financial institution and may involve loss of value. Past performance is never a guarantee of future returns.
Rollovers of qualified plan assets is not your only option. Prior to deciding whether to keep an existing plan, or roll assets into an IRA, be sure to consider potential benefits and limitations of all options and discuss rollover options with your tax advisor.
Contributions to a 529 plan offered by a non-resident state should consider before investing whether the client or designated beneficiary(s) home state offers any state tax benefits only available in the resident state program.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates and are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by contacting your Wedbush Financial Advisor and/or Registered Representative.