Strategies for Paying
GIVING GIFTS TO MINORS
TAKE A SECOND LOOK
Custodial accounts may work well as college savings plans because you have enormous discretion over how to invest the assets. The more confident you are about choosing a diversified portfolio, the more attractive this approach may seem.However, UGMAs and UTMAs also have some potential drawbacks.
- If the beneficiary applies for financial aid, she or he will be expected to contribute up to 20% of the balance each year in keeping with the standard formula.
- When the beneficiary reaches majority, she or he has the right to assume control of the account.
- Any earnings are taxable, unlike earnings in a 529 or ESA.
HOME EQUITY LOANS
DEGREES FOR LESS
If you're looking for other ways to save money on college costs, you might consider encouraging your child to consider an accelerated program:
- Some colleges offer credit for high school advanced placement courses, which could mean finishing a degree a semester, or even two, early.
- Credits earned at local colleges during summer school may count toward graduation and can reduce the number of semesters required.
- Some colleges offer three-year programs that move students through their required courses more quickly.
- Two years at a community or junior college before transferring to a four-year college or university will help lower the total cost of a degree.
A BOND DEAL
WHAT'S NOT SMART
One of the conflicts you may wrestle with is whether to use the money you've invested for retirement to pay for your child's education. Most financial advisers think it's a bad idea because it may leave you short of income later on. But if it makes the difference between your child's going to school or not, you may consider a loan from your employer's plan — if the plan allows loans — or a withdrawal from your IRA.The loan isn't income, so there's no tax. But if you leave your job before repaying the full amount, the balance will be considered an early withdrawal, subject to tax and a federal tax penalty if you're younger than 59½. If you take money from your traditional IRA, you'll owe income tax on the earnings portion of the amount you withdraw and on the contribution portion if you deducted it, though not a prepayment penalty. That's because paying college expenses is considered one of the legitimate reasons for early withdrawal.