College Planning: Considerations for High-Net-Worth Parents
As we approach the end of the 2022 academic year, the thoughts of many graduating high school seniors are turning toward college plans. And, in all likelihood, their parents’ thoughts are turning toward plans for financing their children’s higher education expenses.
Many parents with good financial means already know about 529 plans: the tax-advantaged plans “designed to encourage saving for future college costs,” sometimes known as “qualified tuition plans,” according to the website SEC.gov. These plans, available in all fifty states and the District of Columbia, are certainly excellent vehicles to use for preparing for higher education expenses, since they permit accumulation that is exempt from federal and, in many cases, state income taxes. Furthermore, withdrawals from the account that are used for qualified expenses such as tuition, room and board, books, and fees, are also not taxed as current income. And the high contribution limits—some in excess of $200,000—allow parents with the financial resources to set aside enough to cover most of the expenses directly associated with their child’s attendance at a college or university. And, with the passage of the Tax Cuts and Jobs Act of 2017, 529 plan balances may also be used to offset the cost of private K-12 education, in addition to college.
But are there other good options for defraying college expenses? Should high-net-worth parents be looking beyond the 529 plan in their search for college funding? Following are a couple of suggestions that can also offer financial help for higher education costs.
Don’t forget about merit-based scholarships. Because these are not predicated on financial need, but rather on the student’s scholastic and other achievements, they can become a major source of financial assistance. Often, however, high-net-worth parents don’t fill out the required Free Application for Federal Student Aid (FAFSA) form, assuming that their financial resources will disqualify them for financial aid. The problem is that the FAFSA, or its counterpart, the College Scholarship Service (CSS) form, is required in order to be considered for most merit-based scholarships. So, parents, fill these forms out, by all means.
Many parents utilize the Uniform Gift to Minors (UGMA) account to accumulate funds for college. These should be used with caution, however, since the assets in such plans, which are registered in the student’s name, can limit the student’s access to other types of financial aid that might otherwise be available. Sometimes, it is a good idea to “spend down” these accounts for uses like summer camps, prep school tuition, or even braces, and re-allocate the funds you would have used for such expenses to a 529 plan.
Finally, don’t be afraid to use the good, old-fashioned technique of direct negotiation with the college. Let’s say your child’s first-choice college isn’t offering quite as much in the area of scholarships or special grants as the second-choice school. You should tell school #1 about the other offer and give them the opportunity to match it. Many times, admissions counselors who believe that a student is a good fit with their institution will find money somewhere in order to remain competitive and insure the student’s enrollment. You can and should leverage the competition among college and universities for the most qualified students—it can pay off in lower costs for your child’s higher education.
Bernhardt Wealth Management, a fiduciary financial and wealth advisor, is committed to helping clients make smart decisions about important financial goals such as higher education financing. To learn more, click here to read our article, “Pass It On: Gifting a Roth IRA to a Child or Grandchild.”