09/08/2022
President Biden recently announced a plan to forgive $10,000 in student loan debt for individuals that make less than $125,000 per year, and a maximum of $20,000 for households that make less than $250,000. For those with Pell grants, the limit was increased to $20,000 per borrower. Along with this, they announced that student loan payments would resume on January 1st, and there will be an application process to receive the loan forgiveness. This application should be available in October, and officials advised to submit the application before November 15th so you can receive the forgiveness before payments restart in January.
We will continue to monitor the updates given about the forgiveness process, and while we cannot fill out the application for forgiveness, we are available to answer any questions relating to the process.
Coincidently, we have recently received several related questions from clients on how to best set aside college type funds for children or grandchildren in their lives. I figured it was a good time to write a brief summary of the current options available and the pros and cons of each strategy.
529 Plan
This is the most common and widely used account type for saving for higher education expenses. Usually, the owner is the parent or grandparent, and the beneficiary is the child or grandchild. The owner contributes money to the account (and does not get a tax deduction), the funds are invested until the beneficiary needs the funds for qualified higher education purposes. If used for higher education expenses, then the growth comes out of the account tax and penalty free. A great advantage. However, if for some reason the child does not go to college, and the money comes out of the plan, then the growth is taxed and penalized. There is also an option to redirect the account to a direct family member of the original beneficiary.
Regular Investment Account
This is a very simple and flexible vehicle to save for the next generation. This account is owned by the parent or grandparent, and is just a separate, earmarked account for the child or grandchild. There are no limits on the contributions or withdrawals, no required uses of the funds, and no loss of control by the parent/grandparent. The tradeoff for this one is you will need to pay the taxes on the growth. For example, if an account had $10,000 contributed, and when the funds were needed they were worth $15,000, the growth of $5,000 would be likely taxed at long term capital gains rate (currently) at 15%, meaning $14,250 would make it to the beneficiary. To me, the added flexibility is worth the cost of the tax, considering the changing education landscape.
UTMA Account
A UTMA is a less common account, but we do receive questions about it from time to time. This account is opened up for the minor by a parent or grandparent. Contributions made into the account are irrevocable, meaning they cannot be reversed, and the funds are required to be used for the benefit of the child. When the child turns 18, the account legally becomes theirs, and this is an obvious deal breaker for most parents.
Which one is the best?
The “what if they don't go to college” question has more recently become a serious consideration given the rising cost of college, and the low cost or free alternatives to a traditional university. Thanks to the internet, education has become increasingly decentralized, accessible to all, and low cost if not absolutely free. Current examples include www.khanacademy.org, www.pll.harvard.edu/catalog/free, www.grow.google/certificates.
While certain fields like medicine will likely always require a degree from an accredited university, employers of the future (today’s college debt laden 25 year old's) might not put as much weight on a traditional college degree. This is especially true if the trend of decentralized education continues to develop, and if an applicant can demonstrate they have obtained the skills/certificates needed to do the work required.
Because of this changing landscape, recently most clients have preferred the route of the regular investment account. By no means does this indicate a 529 is a bad option, as currently 63% of California high school graduates enroll in college1. Our anticipation is that the percentage enrolling in a traditional college will decrease in the next 15 years, unless there is a major change in their cost structure.
Everyone’s situation is different, so please reach out if you would like to discuss this more in depth.
