The following article is provided by Univest Bank and Trust Co. For additional information about Univest’s many services, please visit the web site at www.univest.net.
Saving for College in a Post-Pandemic World
Chris Powers, senior vice president and managing director, Girard, a Univest Wealth Division
For many students and their families across the country, the financial aspect of going to college has changed drastically over the last few months as states grapple with how to address the coronavirus pandemic. Many colleges moved to online classes, and families may have lost the income needed to cover college expenses for their children. In order for families to understand their options and how to move forward through these uncertain times, it’s critical to know the different costs to consider, savings vehicles available for college savings and how to navigate the financial aid application process amidst changing finances.
Know the expected costs and changes to expenses. As the country continues to deal with the pandemic, some universities are holding the fall 2020 semester online. With students staying away from campus, it is possible universities could increase tuition to compensate for lost revenue from sporting events and on-campus housing and dining. In addition, although students may no longer need to pay for housing or meal plans, they could need to rent storage units for belongings left on campus. That said, increased time at home might also lead students to work part-time while completing college courses, something they may not have been inclined to do when living on campus if it meant giving up time to socialize and attend events. This additional income could help cover some educational expenses.
Know the three key savings vehicles to consider. The first way families can save for their children’s college education is through taxable accounts made possible by the Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA). These options allow parents to set up a custodial savings account under the Social Security number of a minor. Once the minor reaches the age of majority (21 in most states), they can then move the funds into a regular account in their name. The second vehicle for savings is a Coverdell IRA/ESA, which is tax-deferred. This allows parents to make contributions and utilize funds for educational expenses, but has an annual contribution limit of $2,000. The final and most popular savings vehicle, is a 529 plan, which is tax-exempt. This plan has much higher contribution limits for example, $15,000 per year or the five-year election of a lump-sum of $75,000. Each state manages its own 529 plan, so the rules and guidelines can vary slightly depending on which state the account is set up in. Also remember both parents, grandparents, other family members and friends can contribute to a 529 plan.
Another option is to make direct tuition payments to the school. In this case, grandparents and parents do not have to file a gift tax form which will avoid the tax and generation-skipping transfer.
Know the impact on financial aid. Research shows student loan and financial aid applications are down 20% this year, indicating the financial ramifications of the pandemic are causing students to reconsider college enrollment altogether. However, it may be possible for students to receive more aid than anticipated as universities and colleges try to keep enrollment up. If a family’s income changes in any way, it is important for them to fill out new FAFSA forms and CSS Profiles, when applicable, to reflect these changes and receive the most accurate financial aid assessment. If a family has a college savings account, they should also consider how that will impact financial aid. With FAFSA, having a 529 plan will decrease financial aid by 5.64%, while having UGMA/UTMA accounts will decrease aid by 20%.
Saving for college can be confusing and overwhelming, and the economic woes caused by the coronavirus pandemic haven’t made things any easier. However, by working closely with a financial advisor and becoming educated about financial aid and savings options, it is possible for families to continue contributing to a child’s educational future.
If you would like to get in touch with a Girard advisor to discuss the best way for your family to prepare for college, please contact us to learn how our team can work toward creating the right plan specifically for you.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.
Girard is a marketing name used by Univest Financial Corporation to provide (1) investment and wealth management, fiduciary services and trust services through its subsidiary Univest Bank and Trust Co., (2) specific fiduciary and investment advisory services through Girard Advisory Services, LLC (3) securities products, insurance products and brokerage services through Girard Investment Services, LLC, a registered broker-dealer and member of FINRA and SIPC, and a licensed insurance agency, and (4) investment management and related products and services for Pennsylvania municipal entities through Girard Pension Services, LLC. Investment products and services are not FDIC insured, not a bank deposit, not bank guaranteed, not insured by any federal government agency and are subject to risks, including possible loss of any principal amount invested.
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