Back to school: Education funding at every life stage

Higher education comes with one of the biggest price tags most of us will face. With tuition and room and board at many private four-year colleges topping $50,000 a year,¹ even affluent Americans have to plan well in advance for their children’s or grandchildren’s education funding, says Robert G. Petix Jr., senior wealth strategist for Wells Fargo Wealth & Investment Management.

“The whole issue of the affordability of higher education is a big concern, especially for those who may not qualify for financial aid because of their income level,” Petix says. That said, families have many strategies and tools at their disposal, from planning ahead and using investing to seeking merit scholarships and making strategic choices about which school and program to enroll in.

Those options also apply for education funding beyond a child’s four-year undergraduate degree. And that’s increasingly important: With today’s shifting economy and workforce, many adults are going back to school, whether to finish a degree, enhance their skills, or prepare for a new career. In 2019, roughly a third of college students were age 25 or older, according to the National Center for Education Statistics.

Even older generations are thinking more about plans for education funding, Petix says. Many grandparents want to contribute toward a grandchild’s college costs, and upcoming changes to federal financial aid guidelines may make it even more beneficial for grandparents to contribute.

Here, Petix focuses on an important component of covering the costs of education: building and maximizing the savings for your education funding.

Planning education funding for your child

Petix says that 529 college savings plans are a popular way to save for a child’s college costs.

Please consider the investment objectives, risks, charges, and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.

There are few restrictions on who can contribute to a 529 plan, and earnings and withdrawals are tax-free as long as they are spent on tuition, books, fees, supplies, or other education-related expenses.

Other potential benefits?

• The plans are available in every state.
• If one student doesn’t use the money, the plan can be shifted to another beneficiary in the family (including yourself) without penalty.
• In addition to covering college costs, you can use 529 plan money to pay back up to $10,000 in student loans or to fund K-12 private school tuition.
• Beginning in 2024, it will also be possible to convert up to $35,000 in a 529 to a Roth IRA.

Beginning in 2024, 529 designated beneficiaries can make a rollover contribution from their 529 to their Roth IRA if certain conditions are met:

• 529 must have been maintained for 15 years
• May not exceed the aggregate of contributions and earnings in the account more than five years before the rollover
• May not exceed $35,000 lifetime limit
• Are subject to annual Roth IRA contribution limits
• The Roth IRA owner must have earned income at least equal to the amount of the rollover

One downside is that you are somewhat limited in your investment choices, Petix says.

Coverdell education savings accounts can allow more flexibility in how you invest, and they also offer tax-free growth potential and tax-free withdrawals. However, the maximum contribution is $2,000 a year, and the accounts are available only to families whose modified adjusted gross income is less than $220,000 (or $110,000 for single filers).

There may be some rare circumstances in which you may benefit from setting up an education trust, such as if you hope to fund education for your heirs for multiple generations.

Planning education funding for yourself

If you’re trying to go back to school, first check to see if your employer offers tuition assistance, Petix suggests. About 47% of employers offer the benefit, according to research firm Statista. In many cases, the payment requires a commitment to stay at the company for a certain length of time after you obtain your degree. Some companies are also offer student debt repayment options, which means you could borrow and then repay the loan over time. The requirements for that repayment will likely depend on the company’s plan as well as the program of study you choose.

If tuition assistance is not available, Petix says you may want to consider opening a 529 plan for yourself, saving for a few years, and taking advantage of the tax-free earnings potential and withdrawals. (And don’t forget to explore potential scholarships while you save.)

There are borrowing options as well: Low-interest federal loans and grants may or may not be available to you, or you might be able to borrow against your home equity to pay for your education. (Home equity loans typically have lower interest rates compared with other types of debt.) However, Petix suggests caution when it comes to borrowing, especially given the current higher interest rates.

“I’m not an advocate of debt unless it can be justified for a business or professional reason,” Petix says, “such as if you’re a teacher and earning a master’s degree will increase your salary, or your new degree is going to lead to a second career with the potential for higher income.”

If you’re older than 25, a limited number of colleges have “promise” or “free college tuition” programs that may offer free tuition to adults over a certain age. You could also investigate online courses to bolster your skills and gain knowledge at a lower expense, Petix says.

Planning education funding for a grandchild

Petix says that contributing to a 529 plan is once again your best option. If you have the means, making a large contribution to a 529 plan early in a grandchild’s life so that the investment has a longer period to grow tax-free can be a powerful way to support your grandchild’s education. Some states also offer an income tax deduction for contributions to their state’s 529 plan.

If your grandchild plans to apply for need-based financial aid, the assets in a 529 plan set up by a grandparent do not need to be reported on the Free Application for Federal Student Aid, called the FAFSA. Under current rules, any distributions are reported as untaxed student income, and those payments can reduce a student’s eligibility.

However, beginning next year, a simplified FAFSA form will eliminate the question about gifts from grandparents. Given, the pending change in the FAFSA rules, it will likely make better sense for grandparents to establish a separate 529 account rather than contribute to the parents’ 529 account.

1. Average published charges for full-time undergraduates, 2022 – 2023, tuition and fees for one year for a private nonprofit four-year college: $53,430; “Trends in College Pricing and Student Aid 2022,” Table CP-1, CollegeBoard.org