With less than a week left before Christmas, many are madly dashing around trying to complete last minute shopping. Not me.
Admittedly, our situation is unusual. Carol and I don’t have kids, but we have eleven godchildren, nieces and nephews. It’s a great role—be the crazy aunt and uncle without having to change any diapers.
We are not apt to gift the latest fad that will quickly be broken or forgotten. Instead, we attempt to provide a gift with a better rate of return.
Contributing to an education is the gift that keeps on giving. It will not be discarded after three days of use and it gets better the more you use it. Furthermore, an education cannot be taken away from you in a lawsuit or divorce.
The National Center for Education Statistics states the average cost of a four year university has more than doubled on an inflation adjusted basis since the 1980s. According to data from the College Board Trends in Pricing, the average four year public university currently runs about $23,000 per year, while a private school will cost around $46,000 per year.
However, whether technical school or traditional college, this commitment continues to get more expensive.
Given the high cost of college, it is no surprise that our nation has about $1.2 trillion of student loan debt and the amount of total college debt outstanding increased by 20% from 2011 to 2013.
Most families cannot just “foot the bill” for higher education. It helps to have support and participation from friends and family. As such, when you distribute the kid’s “wish list” this year, encourage those in your life to contribute to your children’s education instead of giving another toy that will be quickly discarded or broken.
As you collect funds for the kid’s college, educate them on what you are doing and why. This will develop buy-in that getting an education is not only a possibility, but an expectation. The earlier you have these conversations the sooner you develop the mindset of saving for the future and delayed gratification.
In terms of accounts, we usually start with a Coverdell Education Savings Account (ESA). This account limits contributions to $2,000 a year, but the earnings are tax exempt for qualified education expenses. You can set one of these up at any brokerage firm and the investment options are quite broad. Fully funding this account can produce $75,000 in value after 18 years.
If you have maximized contributions to an ESA and considered a 529, many parents will evaluate a Uniform Transfer to Minors Act custodial account in the child’s name with the parent as custodian. Again, a word of caution is encouraged. When funding a custodial account there are no tax deductions or exemptions, but you do spread some of the tax impact to your child, who will typically benefit from lower tax rates. Investment choices are unlimited and the funds can be spent on anything.
However, recognize that once the child turns the age of majority (no later than 21), whatever funds are in that account will be their property to use however they wish. As such, from a control perspective it might be best to keep those funds in mom and dad’s name and distribute on an “as needed” basis.
Higher education, whether traditional college or trade school, sets a person on a path to financial independence. Although saving for this endeavor may not have the initial “wow” factor of a new drone, the value of an education will be far greater in the long run and something that everyone can contribute to.