Funding Higher Education: Last-Minute Strategies

It’s Friday, and we are at the home stretch of our week long blog discussion on funding higher education. Let’s talk about gifts and tax considerations. Parents and grandparents can make gifts worth up to $11,000 per year, per child, free of any gift tax. If both parents and both sets of grandparents give combined gifts of $22,000, a child could accumulate as much as $66,000 in a single year! The annual gift tax exclusion is indexed annually for information.

The gifts can be held in a Uniform Gift to Minors Act (UGMA), Uniform Transfer to Minors Act (UTMA), or in some other vehicle, depending on the state in which they reside. Investing under a child’s name could trigger an income tax issue. Under the “kiddie tax,” until a child reaches age 14, unearned income below a certain rate amount will be taxed at the child’s lower rate. The excess will be taxed at the parent’s tax bracket. When the child reaches age 14, all income generated in his or her name is taxed at the child’s rate. Keep in mind that assets placed in a child’s name could reduce financial aid or make the child ineligible for financial aid.

Last-Minute Strategies

If you’re starting to prepare for education expenses that are just over the horizon, take heart. There’s still time to take steps to prepare for the costs, and even when your child starts college, you still have four to five years to save. Families that are one to three years away from the college admission process may want to take advantage of the short-term options such as bank certificates of deposit (CDs), or U.S. government notes. Unless the total amount needed is already in saving, students should apply for any source of financial aid. This includes scholarships, grants, or loans available to both students and parents. Students can also investigate work-study programs along with after-school and summer employment to supplement the range of financial avenues to a college education.

Other last-minute strategies exist, but most should be viewed simply as last resorts. For example, you could consider a home equity loan with tax-deductible interest within limits, a refinanced mortgage that frees up cash, or borrowing from your retirement savings. But, these options could cause you to mortgage your future. In many cases, parents are saving for their own retirement at the same time their children are attending school. If you use the money you’ve saved for retirement your child’s future, what will happen to you?

Start Now

The beauty of your plan will be your ability to change it. This kind of flexibility is to your advantage, because your goals will change as time goes by. There’s no need to put off planning. The time is now. Defining your goals early will help you plan to reach them. Isn’t now the best time to start planning for your life? While your at the beginning don’t forget to check out how much you would save on auto and home insurance through us!

-Robert Catalano