Phoebe Venable: Two schools of thought on college bills

Those of us who are considering paying for our children’s college education can add a third certainty to the list of death and taxes: a big, fat tuition bill.

Given the climbing costs of college education and the fact that it can substantially set back a nest egg or retirement savings, it’s not surprising that some parents take a tough-love stand on this issue: “Sorry, junior, you’re paying your own way through college — and it’s going to be good for you.”

The two sides to this debate were recently laid out in a Wall Street Journal article. “Education is an investment in your children’s future, and by extension your own,” says Dr. Meir Statman, a professor of finance at Santa Clara University. Not so fast, says psychotherapist and author Linda Herman: “It is time to treat young people as the adults we wish them to be. And that includes expecting them to step up to the plate and take responsibility for paying for college.”

I see the merits of both arguments. As a financial adviser, I see education as an investment that could pay handsome dividends in the future — and as a parent, I can’t think of a better beneficiary of those possibly life-altering returns than my own child. But as an instructor of financial fundamentals to the children of high-net-worth individuals — and once again, as a parent — I believe in instilling “financial character” in children, ensuring that they understand and value hard work, sacrifice and self-sufficiency.

My suggestion is this: Do both. Contribute to your child’s college education and expect them to put some skin in the game by working, saving, earning scholarships and getting low-interest federal education loans.

Building a college fund for your child doesn’t have to be insurmountable. In fact, the planning and discipline that goes into it could spread into all facets of your financial life. Your example could be just as powerful a lesson for your child in the deferral of immediate gratification for the sake of long-term gains as insisting he or she pay the totality of college’s costs. Just be sure to start early and consider a 529 plan.

Education savings plan

A 529 plan is an educational savings plan operated by a state or educational institution, named after the IRS code section that created them. There were two types of 529 plans created: a savings plan and a pre-paid plan. Tennessee’s pre-paid plan has been closed to new participants since 2010 but the state does offer a 529 savings plan called TNStars (although you can participate in any states’ plans). For more information about this program, go to www.tnstars.com.

The 529 savings plan account works a lot like a 401K plan in that contributions are invested in mutual funds or other investment vehicles. The plan you choose will provide you with investment options and the value of the account will go up and down based on the performance of the investments you select. These accounts are easy to set up and contributions can be automatically deducted from your bank account every month.

You can make contributions — which are gifts — of up to $14,000 a year. There also is an option that allows you to fund a 529 savings plan with up to $70,000 (single) and $140,000 (married) in one year but then no contributions can be made for five years. Tax forms are required for this accelerated gifting; please consult your tax professional.

Although your contributions are not tax-deductible on your federal income tax return, the earnings are tax-deferred. Distributions from the account to pay for the child’s college costs are tax-free. You, as the donor, control the account, which means you call the shots. You decide when distributions are made from the account and for what purpose.

If your child (the beneficiary of the 529 Plan) does not use all of the funds, you can reclaim the funds, but the earnings portion will be subject to income tax and an additional 10 percent federal tax penalty will be imposed on the earnings, as well. An exception can be claimed if you withdraw the funds due to death, disability or if your child receives a scholarship and doesn’t need the funds for college expenses.

Another great feature of these savings plans is that a family with more than one child can change the beneficiary. If your oldest child receives a scholarship and does not need the 529 funds, you can change the beneficiary to another child and avoid the penalty or at least defer it until all of your children have completed college.

A financial adviser can help you select the right plan for your family.

Phoebe Venable, chartered financial analyst, is President & COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean