Planning for College Expenses

Cary Biren, Portfolio Manager, First Republic Investment Management

August 6, 2015

A four-year undergraduate degree at a private school is projected to cost more than $700,000 by 2033, when a child born today would be expected to enroll. For any parent, the amount is daunting — which makes planning and saving particularly important.

There are three main ways to save for a child’s college education, each with pros and cons. 

Custodial Accounts

Custodial accounts, sometimes called “Uniform Gift to Minors” (UGMA) accounts, are easy to set up and available everywhere. The account has a beneficiary, the child, and a custodian, generally a parent or grandparent, who is responsible for overseeing the account until the child reaches the age of majority. These accounts are quite flexible, giving a custodian who is not the child’s parent full discretion to use UGMA funds for any expense that benefits the child.

The downside to UGMA accounts is the ownership structure. Since they are titled in the child’s name, UGMAs would be considered part of a child’s assets when qualifying for financial aid. A potentially greater concern is that upon reaching the age of majority (18 or 21, depending on your state) the child gains full control of the money.

529 Plans

A 529 savings plan offers a tax-advantaged way to save for higher education. Funds invested in this type of plan can grow free from federal dividend and capital gains taxes as long as plan assets are used for qualified expenses. Some individual states may even allow for tax-deductible contributions.

Another benefit of the 529 plan is that the donor always retains controls of the assets. If the donor wants to change the beneficiary, it can be done without penalty as long as the new beneficiary is in the original beneficiary’s immediate family. The assets also are not counted as part of the child’s assets when qualifying for financial aid.

Contributions to both UGMAs and 529s are considered gifts, per IRS gift tax rules. Anyone can make a contribution to either plan, up to $13,000 per year, without having to file a gift tax return. For 529 plans, gifting rules are even more generous, allowing donors to contribute up to five years of tax-exempt forward gifting during one year.

Traditional Investment Accounts

The simplest way to save for college is to open a segregated account in a parent’s name and earmark that account for education. There is no tax benefit to this strategy, but it does preserve full flexibility and control for the parents. Saving in this manner requires discipline; this type of account should not be relied upon when other expenses arise.

Deciding on a Direction

So which option is best? That’s going to depend on your individual situation. As with most investment endeavors, an appropriate plan of action — especially one that begins as early as possible — should ultimately pay huge dividends toward reaching your goal.

If you need help deciding which approach might work best for you, feel free to consult your First Republic wealth management professional.

Investment Advisory Services are offered through First Republic Investment Management, an SEC-registered Investment Advisor and a wholly-owned subsidiary of First Republic Bank.

The strategies mentioned in this document will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice.  This information is provided to you “AS IS”, does not constitute legal advice, is governed by our Terms and Conditions of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here.  Client’s tax and legal affairs are their own responsibility – Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this document.

©First Republic Investment Management, 2015