College Funding: It’s a Family Affair

Funding a college education shouldn’t fall solely on parents. Families can collaborate across generations to achieve their financial goals.

The Growing Cost of College

As children approach college age, parents often worry about the rising costs of post-secondary education. For the 2023-24 school year, the average cost after tuition, fees, room, and board was $28,840 at in-state public four-year colleges and $60,420 at private institutions, according to the College Board. These expenses continue to rise.

Many parents assume the responsibility of paying for college. An RBC Wealth Management–U.S. survey found that 49 percent of Americans prioritize their children’s education over their retirement savings. However, wealth planning professionals believe that funding college is a shared family responsibility. “Parents wanting to pay for college is a noble goal,” says Griffin Geisler, a wealth strategist at RBC Wealth Management–U.S. “But there are many other ways to finance a college education.”

Students Should Be Proactive and Flexible

Geisler recommends that students contribute to their college costs, even if families can afford the full expenses. “It’s beneficial for kids to have some skin in the game,” he says.

Ways Students Can Help Fund Their Education:

1. Earn College Credits Early: By taking Advanced Placement (AP) courses or special academic exams, students can earn college credits in high school, potentially reducing future college costs. Over the past decade, the number of high school students taking AP courses has nearly doubled, aiding in scholarship qualifications.
2. Consider Community College: Students can cut costs by spending two years at a community college before transferring to a four-year institution. Despite declining enrollment, community colleges offer substantial savings and improved credit transferability.
3. Apply for Scholarships and Grants: Numerous scholarships and grants are available from federal and state governments, colleges, and civic groups. Students should start researching these options early, ideally by their freshman or sophomore year.

Parents Should Explore Various Funding Options

Parents need to educate themselves about the different funding options available. A financial advisor can help balance the need to fund a child’s education while saving for retirement.

Funding Options for Parents:

1. 529 Plans: These tax-advantaged savings plans are sponsored by states or educational institutions, with earnings accumulating tax-free if used for qualified education expenses. Contribution limits are generous.
2. Coverdell Education Savings Accounts: These accounts can be set up for any child under 18, with contributions growing tax-deferred and distributions used for both K-12 and post-secondary education.
3. Education Assistance Programs: Some employers offer tuition reimbursement or company scholarships. Parents should explore these options if available.
4. Life Insurance: Certain life insurance policies allow policyholders to access the cash value through loans or withdrawals, which can be used for education expenses.

Grandparents Can Lend a Hand

Grandparents can alleviate the financial burden by using a portion of their required minimum distributions (RMDs) from retirement accounts to fund their grandchildren’s education. This helps adult children save for retirement.

Grandparent Funding Strategies:

• Gifting RMDs: Retirees must withdraw funds from retirement accounts starting at age 73 to avoid penalties. Excess funds can be gifted to grandchildren, though tax consequences may apply for gifts over $18,000 annually unless paid directly to the educational institution.
• Custodial Accounts: Contributions to Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts can help. Contributions to a 529 plan can also be beneficial, allowing acceleration of up to five years’ worth of annual gift tax exclusion amounts.

A Collaborative Family Effort

Regardless of the method, grandparents’ involvement in funding education is invaluable. With rising education costs, paying for college is increasingly becoming a collaborative family effort. “Paying for college is a personal family planning decision,” says Geisler. “Start the conversation early, make a plan as a family, and figure out collectively how you’re going to pay for it.”

Conclusion

With the cost of post-secondary education continuing to climb, it’s essential for families to work together. By exploring various funding options and involving multiple generations, families can better manage the financial burden and support the next generation’s educational aspirations.