If you think education is expensive, try ignorance. Not having a college degree becomes more of a handicap every year.
You want to make sure that your children – or your grandchildren – have the money to go. The big question is how best to pay for it. The cost of an education is rising at roughly twice the rate of inflation. Figuring out how much money to set aside involves some complex calculations. And there are more options for education funding than most people can keep straight.
College savings vehicles
You need to know about Section 529 plans. And Coverdell ESA accounts are still around, at least
for now. Both 529s and ESAs provide some tax breaks for college savings, but they each have a very different set of rules. Then there are U.S. Savings Bonds, which also provide a tax break when used to pay tuition and fees – provided you follow certain procedures and are income qualified.
You might use zero-coupon bonds. These corporate bonds generally have higher rates of return than government bonds. Although they generate an annual tax bill without paying you any annual income, they provide an unusual degree of certainty as to how much money should be available for your appointment at the bursar’s office.
Don’t forget accounts held in the child’s name, such as the UGMA, UTMA, or even an IRA. Some assets in the child’s name might be more lightly taxed than a parent’s assets. On the other hand, children’s accounts raise the specter of the kiddie tax, and the IRA requires its owner to have earned income.
Specialized trusts like the 2503(b), 2503(c), and the Crummey Trust also offer advantages, provided you are going to contribute enough money to justify the cost of having the trust drawn up.
Loans may need to figure into the mix. But which should you pursue? Interest on home equity loans is generally deductible, but using these loans puts your house at risk. Borrowing from your 401(k) is another option, albeit one that interferes with building your retirement fund.
The student might qualify for a low interest Perkins loan. Parents or grandparents might get a Stafford loan. Both Perkins and Stafford loans are based on financial need, whereas PLUS loans are not, making them available to tuition payers with higher incomes.
Permanent life insurance gives you the option of policy loans. Structured properly, the money is tax free, and there’s no pressure to repay. But structured improperly, you could lose your coverage.
Newer options include programs that let you borrow against the investments in your brokerage account. The best versions have no application fees, no stipulations on how the money is used, and no required repayment schedule.
Why does it feel like you need another college degree just to understand all the options? The good news is you don’t. If you’re committed to sending someone to college, we’re committed to helping you find the smartest way. We invite you to get to know us by perusing the rest of our site. And if you’d like to talk, just contact us.

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