As kids head back to school this fall, we’re likely to hear many stories about young people starting their post-college lives with massive student loan debt. But in January of this year, the Consumer Financial Protection Bureau published a pretty startling statistic: The number of consumers age 60 and over with student loan debt has quadrupled – yes, quadrupled – in the U.S. over the last decade. Believe it or not, people 60 and older are the fastest growing age-segment of the student loan market! Part of the reason, according to the CFPB, is that more and more parents and grandparents are financing their children’s and grandchildren’s college education, either by taking out loans themselves, or by co-signing a loan with the student as primary borrower.
Carrying student loan debt late in life presents a number of challenges to older consumers.
First, let’s talk about income. When young people take out loans for school, it’s generally expected that these borrowers will eventually grow their income, making it easier to pay off their debt. That’s not true for older borrowers, whose income is more likely to decline as they age. Second, declining mental and/or physical health could also contribute to problems, preventing some older Americans from continuing to work to pay off their loans.
Here’s another frightening statistic: Sallie Mae reports in its How America Pays for College study that while close to nine in 10 families knew their child would attend college as early as his or her preschool enrollment, fewer than four in 10 families actually created a plan to pay for college before their child reached college age. So how can parents and grandparents help foot the bill without placing their own finances at risk? One idea is to invest in a 529 plan. Created in 1996, 529 plans are named for the section of the Internal Revenue Code from which they originated. These plans offer a tax-advantaged way to save for a college education, but just 13 percent of families reported using them in the last year, according to Sallie Mae.
529 Plans in Colorado
Colorado offers four options through the CollegeInvest 529 College Savings Plan, and eligible expenses include tuition, fees, certain room and board expenses, required books and supplies, computers and related equipment/software, and internet access. If the child or grandchild decides not to go to college, the money can stay in the account or be used for another educational opportunity. The assets can be withdrawn for other purposes, but the account owner would then be subject to penalty fees and income taxes.
On the plus side, the proceeds in a 529 plan account accumulate free of federal and state income taxes, and all withdrawals used for qualified college expenses are exempt from federal taxes.* However, even if parents or grandparents own the account, the money will appear as income for the student, and that could affect his or her ability to qualify for financial aid. A possible solution could be to delay distribution of the proceeds until the student’s last two years of college.
Depending on the need for financial aid, gifting could be another option, as could direct payments to the educational institution. Some families also consider a gift trust, which can offer more flexibility because if the child does not go to college, the money could be used for other purposes, such as purchasing a home.
Because every family situation is different, parents and grandparents should work with a financial planner to figure out an option that works best for estate planning needs, as well as a for funding an education. At M.J. Smith & Associates, we welcome the opportunity to help families choose a path to college funding that can help offer growth while being both cost-effective and tax-efficient. If your financial goals include providing for your child’s or grandchild’s college education, please feel free to contact us for a complimentary, no-obligation review of your portfolio. We would be glad to discuss the options with you.
* May be subject to state, local and alternative minimum tax.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of McKenzie Ebbesen and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investments mentioned may not be suitable for all investors. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer's official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.