The Challenge of College Costs
While not news, it’s worth recognizing that paying for college is a major financial challenge for American families. The already high price of college continues to go up at a rate much higher than other goods and services. Many families see the price of college and feel paralyzed. Using a combination of approaches such as scholarships, work-study, or other programs is important. Saving for college in your family with opportunities like a 529 college savings plan can be an important piece of the puzzle to help pay for college.
"Train up a child in the way he should go; even when he is old he will not depart from it." Proverbs 22:6 ESV
Family and Friends Need a Framework
Family and friends love your family including your children. If you did a poll and asked if they were willing to help with sending your children to a university someday, you would probably be blessed with enthusiastic replies. Without a place to channel that positive will and energy, action is unlikely to happen. Many Americans, probably including your circle, don’t realize that they can contribute to the future education of your son or daughter. Anyone, family or otherwise, can contribute money towards the education of someone else.
How to Get Started with Encouraging Educating Gifts
Setting up a 529 Plan
Before you can encourage others to give money for education, there needs to be a place for those gifts to go.
Types of 529 Plans
529 plans are a way to save money over time that can be used for college expenses. These types of accounts can be setup as early as when a child is born. 529 plans are set up for your future student or what these types of plans call a beneficiary. 529 plans come in two types:
Prepaid Tuition Plans
This type of 529 allows you to buy credit for future tuition at today’s prices. The idea here is that tuition will continue to go up and your family locks in some level of savings at today’s relatively lower prices. Money in prepaid tuition plans cannot be used for room and board, only tuition.
Education Savings Plans
This type of 529 allows families to put money in an account and choose investments to help the money grow over time. A major benefit of this arrangement is your family does not pay taxes while the money is growing like you would with an account just in the child’s or parent’s name. If the money is used for “qualifying educational expenses”, no taxes are owed when money is withdrawn either. Money in the Education Savings Plan 529 can be used for a broader range of expenses beyond tuition for things like books, computers, and room & board. When most people talk about 529 plans, this is the type they are referring to.
Tips for Setting up A 529 Plan
- Avoid “Advisor-Sold” or “Broker-Sold” 529 plans that carry sales commissions. You can get help without having to pay high fees every time you put a dollar into your child’s plan.
- Most 529 plans can be opened online in a few minutes.
- You’ll be asked to choose a beneficiary for the plan. This is the child you want to attend college someday.
- 529 Plans are generally specific to your state. Some states offer several options for providers.
- A 529 is specific to a child. In other words, a 529 plan can have one child listed as a beneficiary. An additional 529 can be opened for each child if you wish.
How to Communicate with Friends and Family About 529 Gifts
After your 529 is setup, then it will be important to let friends and family know they can help. When birthday time rolls around, share with friends and family this additional option to celebrate your child’s birthday.
3 Tips for communicating with family about 529 birthday gifts
- Educate family fiends on what a 529 plan is and what the money will be used for down the road.
- 529 plans allow gifts as small as $10. Check your specific plan to see the minimum size of a gift.
- Remind potential gifters that their gift will benefit from compound interest and grow over time.
"A mind is a fire to be kindled, not a vessel to be filled." Plutarch
How Do Family and Friends Make Gifts to a 529 Plan
529 plans vary with respect to options for making gifts. You’ll to confirm the specific ways loved ones can make education gifts for the benefit of your children. These are some of the possible ways (specifics will depend on your plan/state) to make a gift to a 529.
Some providers allow gift cards to be bought and applied toward a 529 balance. This is similar to when you receive an any other gift card use a code on the card to add an amount to your account.
Mail a Check and a Form
This option is exactly what it sounds like. Print off a form, fill out your information, and send a check. It’s not convenient, but some family might prefer this option.
Use a Code
Some plans allow a family member to make via the plan’s portal online. The plan provides a code you can provide to potential gifters. The gifter then enters the code when completing the transaction to tie the contribution to your son or daughter’s 529.
Share a Gifting Link (Credit/Debit Card, Bank Transfer)
Some plans allow you to send a specific URL or link to allow a gift. The link can be shared via email or social media to allow gifts via credit/debit card or sometimes bank transfer. For many, this is the easiest and most convenient option.
Third party Services
In the last few years, some companies have sprung up offering services related to 529 plans. Some of these services, in addition to other things, help facilitate gifts to 529 plans. Be sure to check for any fees or conditions before using a third-party service.
The Impact of a 529 Birthday Tradition
What’s the impact of college gifts on birthdays over time? This tradition has great potential. Here’s an example:
The Morris Family (Zack and Kelly) decide they want to give friends and family a chance to contribute to their son Mac’s college education. Starting on Mac’s first birthday, 10 people decide to contribute $10. Each year, that $100 is invested into a 529 education savings plan. The Morris family chooses a diversified investment option that earns an average of 7 percent per year. After 18 years of regular birthday gifts and compounding, Mac has about $3,400 available to help with college expenses.
Things to Watch out for with 529 Gifting
Potential Gift Tax
This tax would be rare with a birthday gifting scenario, but keep it in mind. The federal gift tax can come into play when a someone makes a large gift to another person, including a child. For gift tax to be an issue, a gift would need to be substantial. The gifter is responsible for the tax if it applies. It’s best to check with a qualified financial advisor or a CPA if a loved one think gift tax might apply.
There’s a learning curve
Giving money for the future benefit of a child’s education might not make sense or may even seem strange to some. If you mention the idea and someone is not receptive, leave it at that. If they do want to learn more, then encourage the question. Avoid pressuring anyone to take advantage of the birthday tradition.
Some people just want to give a gift
If a grandparent says they just want to give a toy, let them. If a godparent prefers a present that can be unwrapped, let them. The birthday 529 tradition is often best presented as a nice to have. Give a present the child can enjoy now and a contribution toward their future education. If that works, great. If not, celebrate in your loved ones preferred way.
Should You Try College Funding as a Birthday Tradition?
Talk with your spouse, but give the 529 birthday tradition a try. You might be surprised by how much a grandparent, uncle, or friend from church likes the idea of a gift that can grow over time. How proud will they be when college graduation day comes and they got to be a part of the journey?
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