The smart way to save for a child’s education

College education is expensive. This isn’t news. In Tennessee, the average cost for in-state tuition is nearly $15,000 a year. That number will increase—sharply—if your child chooses to attend a private school, or pursue studies out-of-state.

Most parents and grandparents understand that paying for a child’s education requires a great deal of planning. Starting to save early is crucial. But there are multiple ways to save, and selecting the appropriate approach can be confusing—and stressful. As such, it’s important to understand the options from the very outset.

529 contributions vs. educational trusts

Tennessee offers 529 savings plans to all its residents. These plans were developed with the intent of helping families set aside money for future college costs. If the funds within a 529 account are used for qualified education expenses, then they will not be subject to federal income taxes. There are no enrollment fees and there is seldom need for a financial advisor, and as such these plans benefit a great many families.

529 plans are somewhat limited, however. There are limits to how much can be contributed each year, and restrictions governing how the funds can be spent. (Otherwise, taxes will kick in.) And only cash contributions—such as checks and money orders—are accepted; one is not permitted to fund the account with stocks, mutual funds or other like holdings. Nor is one permitted to use the funds for high school or elementary school; the plan is focused on higher education.

As such, many families prefer to establish an educational trust. This is a potent estate planning tool that allows grantors to place assets into tax-advantaged trust funds to be used for a child’s, or children’s, education. In most cases, participants are able to contribute assets in any form, and in any amount.

The only note on trusts, as any estate planning attorney will point out, is that they must be drafted with care. If you delineate that a trust is only to be used for “college,” for example, then beneficiaries (your children or grandchildren) may be unable to withdraw funds for graduate school—even if that wasn’t your intention. Such matters can be problematic when overlooked, but are easy to address.

What if I have multiple children?

Fairness is a concern for many parents, and comes into play when establishing an educational trust. As a recent article in Barron’s makes clear, parents must decide whether they want the trust to distribute equal dollars or equal benefits—it may be impossible to achieve both.

If one child attends a private college and goes on to pursue a master’s degree, his or her education will cost a great deal more than a child who takes care of prerequisites at a community college and then finishes their degree at a public institution. Depending on how the trust is written, the assets within it might be allocated to pay for any educational endeavors that beneficiaries choose to pursue, or it may stipulate that all beneficiaries receive the same amount. It is not hard to see that such decisions require a good deal of thought.

Education is a priority

A college degree, for most intents and purposes, has become a necessity for individuals who want to enter the workplace. And education isn’t getting more affordable. It’s crucial that parents consider how best to set aside funds for their children’s education, and know how to take advantage of the tools available to them.