Buzz
Is a college education still worth the high price tag, or has it become overvalued? If it’s too expensive, what alternatives to a 529 account can help set your child up for success? Let’s dive into that this week.
Every Monday, we address a burning personal finance question by gathering insights from a range of money experts. If you have a general question or financial concern—or just want to chat about anything personal finance-related—leave a comment or reach out via email at [email protected].
This week’s question comes from Katie:
I recently had my first child, and I’m eager to start saving for her future. Initially, I was set on opening a 529 plan, but now I’m leaning toward a trust fund instead. (I’m concerned that college degrees might be overrated, and by the time my daughter turns 18, she might not even want or need to attend college.)
I’d love to see a side-by-side comparison of the pros and cons of each option.
This is the general perspective of financial experts on a matter that impacts everyone differently—if you're seeking tailored advice, it's best to consult with a financial planner.
Be Cautious with Trusts
Trusts have clear advantages: they provide far more flexibility in how funds are distributed compared to a 529 plan, and you get to choose when your child can access the money. However, there are two significant drawbacks to consider, as highlighted by student loan expert Mark Kantrowitz: the tax consequences and the impact on financial aid.
Funds in 529 accounts grow without being taxed, and they aren’t taxed when withdrawn for qualified educational expenses. That’s a huge advantage. Plus, starting in 2018, you can use up to $10,000 annually for tuition at public, private, or religious elementary and high schools.
Next, consider the impact on financial aid. Most trust funds (except those created by court order) must be reported when your child fills out the FAFSA, potentially lowering eligibility for need-based aid by 20% of the fund’s value.
“In contrast, a 529 plan owned by the student or parent is assessed on a tiered scale, lowering aid eligibility by a maximum of 5.64%,” says Kantrowitz. “For example, a $10,000 trust fund will reduce aid by $2,000, whereas the same amount in a 529 plan will lower aid by no more than $564.”
So, if there’s even a possibility that your child may attend college—more on that later—a 529 plan is likely the safer option.
If you’re not yet convinced, consider a Roth IRA, as long as you meet the income requirements. It’s not included in FAFSA calculations and offers penalty-free withdrawals for educational expenses. “As long as no distributions are taken, it won’t affect aid eligibility,” says Kantrowitz. “And if she doesn’t go to college, it will help her get a head start on retirement savings.”
If you want to dive deeper into this, Investment News offers a useful guide on different types of trusts you might consider setting up.
Reevaluating the College Decision
That said, a college degree is still likely the most promising route for your daughter in terms of career and earnings. “Be cautious: If a parent believes their child won’t go to college, it can become a self-fulfilling prophecy,” warns Kantrowitz.
The Bureau of Labor Statistics reports that individuals with a four-year degree earn a median weekly wage of $1,286, while high school graduates earn $713. Moreover, 36% of Americans hold at least a Bachelor’s degree, and according to CNN Money in 2016, 8.4 million of the 11.6 million jobs created after the Great Recession went to those with a bachelor’s degree or higher.
However, this doesn’t mean you need to save tens of thousands for your daughter to pursue a less lucrative career if that’s important to you. As I wrote here, there are many alternatives to the “traditional” college path. Community colleges, technical schools, and even attending a state public university can significantly lower costs. Your child might even want to consider taking a gap year.
There’s no denying that college costs are rapidly increasing, and it might seem like the investment isn’t worth it. But all evidence still points to a college degree being the best path into higher-paying fields for most people. So don’t be too discouraged by the rising costs of higher education. Explore your financial aid options, contribute to a 529 plan if possible, and most importantly, make sure your child understands the full range of options available to them.
