Alternative College Funding Opportunities

17 Feb 2023 Alternative College Funding Opportunities

Authored by Haynie & Company Partner Bernard Abercrombie, CPA

Many of our clients approach us each year about the ever-increasing costs of college education for their children. Most of our client’s children will not be eligible to obtain need-based scholarships when the time comes for them to head off to college, so their parents want to know what alternatives might be available.

529 College Saving Plan

The most common are two different variations of 529 plans. The traditional 529 plan is an education savings plan that allows non-deductible contributions into a plan that grows in value over time.

These plans are available almost everywhere and are just tax-beneficial investment accounts. Money contributed can be invested in various investment options the sponsor offers, similar to an employer’s 401(k) plan.

Over time, these accounts grow in value. When the child reaches college age and funds are withdrawn to pay for qualified educational expenses, the earnings in the account that are distributed are free of income tax. The earnings become taxable if the funds are withdrawn and not utilized for qualified educational expenses. An additional advantage is that funds originally intended for a specific child can be moved for another child’s benefit.

529 Prepaid Tuition Plan

A second alternative is the Prepaid Tuition Program. These types of plans allow the account holder to purchase “units” or “credits” at participating colleges in advance. These plans guarantee to pay for that level of college education regardless of what those costs might grow to when the child reaches college age.

In addition, these types of plans are generally offered by state governments. These plans are most beneficial when the child goes to college in that state but can be somewhat forgiving if a child decides to attend college in another state. A Texas plan that was well-known several years ago was the Texas Tomorrow Fund. The Texas Tomorrow Fund was replaced by what is now known as the Texas Guaranteed Tuition Plan. The theory is that a payment today based on the current college education costs will pay the future cost of that same education. Most people would likely agree that College funding costs are increasing significantly faster than inflation, so this is a hedge against those future costs.

All 50 states offer at least one of these types of plans, and many offer both options. The penalties associated with prepaid tuition programs can be more complicated than the traditional education savings plans.

Making A Decision

Before choosing either of these options, a level of due diligence should be performed to understand each alternative’s pros and cons.

Finally, there are some potential additional strategies for parents who own their businesses and have the opportunity to employ their children in those businesses that are outside the scope of this article. Supporting documentation in those situations is required and should be discussed at length with your tax advisors.

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