An education goal has a clear date and a rough cost, which makes it unusually suited to planning. The main decisions are how much of the cost to fund, how to hold the money as the date approaches, and how the goal fits alongside others.
Defining the goal
An education goal is more specific than it first appears. It includes who is to be educated, what kind of institution and program is contemplated, what share of the cost the family intends to fund rather than leave to the student, to financial aid, or to borrowing, and when the money will be needed. A goal to fund the full cost of a private university is very different from a goal to fund a portion of a public one, and both are legitimate.
Education costs have historically risen faster than general inflation, so the estimate of the future cost should not simply be today's figure. Published cost data and inflation assumptions can help produce a reasonable range, while recognizing that the actual figure will not be known until the time comes.
Time horizon and risk
The defining feature of an education goal is that its date does not move. A retirement can be deferred; a first tuition payment generally cannot. This has consequences for how the money is held. When the date is many years away, there is time to absorb the fluctuations that come with investments that carry more risk. As the date approaches, that time disappears, and a loss in the final years before payment cannot be waited out in the way it could a decade earlier.
For this reason, education savings are often managed with an explicit path in mind: more exposure to market risk when the horizon is long, moving toward more stable holdings as the horizon shortens. The particular path appropriate for any family depends on how much has been saved relative to the goal, what other resources are available, and how the family weighs the risk of a shortfall against the possibility of higher growth.
Ways to save
Several kinds of arrangement are commonly used to hold education savings, and they differ in tax treatment, in control, in flexibility, and in how they are treated by financial-aid formulas:
- Tax-advantaged education savings plans, such as 529 plans, which offer tax benefits for qualified education expenses and are subject to rules on contributions, investments, and the uses to which funds may be put.
- Custodial accounts, in which assets belong to the child and pass to the child's control at a set age, whatever the child then chooses to do with them.
- Trusts, which can offer greater control over how and when funds are used but involve legal and administrative considerations.
- Ordinary taxable accounts, which offer full flexibility and no special tax treatment.
Each carries trade-offs, and the rules governing tax-advantaged arrangements change from time to time. The choice among them, and any question about the tax treatment of a particular arrangement, should be considered with a qualified tax professional.
Education alongside other goals
Education is rarely a family's only goal, and it competes most directly with saving for retirement. The two have different characteristics: education costs arrive on a schedule and can be met in part by aid or borrowing, while retirement has no schedule and cannot be borrowed for. Many families conclude that education savings should not come at the expense of their own long-term security, and set the education goal at a level that respects that.
Grandparents and other relatives sometimes wish to contribute. Gifts toward education can have tax and financial-aid consequences depending on how and when they are made, and these are worth understanding before rather than after the gift.
- What share of the expected cost do we intend to fund, and what will the rest depend on?
- How many years remain, and does the way the money is held reflect that?
- Do we understand the rules and the tax treatment of the arrangement we are using?
- Is our education saving consistent with our own retirement plan, or is it drawing from it?
- If a relative wishes to contribute, do we know how best to receive that contribution?
Education funding is one of the matters the firm's financial planning and consultation service may address, alongside goal and cash-flow planning, investment and asset-allocation planning, retirement planning, and review of an existing portfolio. The firm does not provide tax or legal advice; where a client's circumstances call for it, the firm may coordinate with the client's own tax and legal professionals. The firm's services, fees, and conflicts of interest are described in its Form ADV; see also the Wealth Management page.
This note is provided by Swiss Finance Private Wealth Management LLC for educational and informational purposes only. It is general in nature, does not take into account the objectives, financial situation, or needs of any particular person, and should not be relied upon as investment, legal, tax, or accounting advice, as a recommendation of any security, strategy, or course of action, or as an offer of advisory services. Advisory services are provided only under a written advisory agreement. Investing in securities involves risk of loss that clients should be prepared to bear; no method of analysis or investment strategy can eliminate the risk of loss or assure a profit, and diversification does not guarantee against loss. The firm does not provide legal or tax advice; readers should consult their own attorney and tax professional about their circumstances. Laws and regulations change, and the firm undertakes no obligation to update this note. The firm's services, fees, methods of analysis, risks, and conflicts of interest are described in its Form ADV, available through the SEC's Investment Adviser Public Disclosure website.