I’d love to hear your thoughts on parents’ contribution to a child’s college education.
We are blessed with three children: The eldest is a high-school sophomore. We have ample assets: $3 million and no debt. Is a maximum contribution toward a child’s college education of, say, $50,000 or $12,500 per year appropriate? We would suggest that everything beyond that is their responsibility. Is that reasonable?
Do we have an inherent responsibility to support our children with college and, perhaps, skimp on early retirement or otherwise enjoy our lives to the fullest? How do parents who are approaching this issue ensure that their kids keep some skin in the game of “paying for college?” I’d prefer to not see my kids saddled with student-loan debt.
The Parents
Dear Parents,
No one is obliged to delay their retirement.
Every expenditure — whether it’s a vacation or a college gift or a new car — is a trade-off between saving money for retirement and enjoying your life while you are healthy enough to enjoy it — and part of that is seeing your children get an education.
Your suggestion of $50,000 per child seems like a very generous start and will help them reduce any student debt they’ll need to take on during their college years. In-state tuition will be far cheaper than if you send them to an out-of-state college.
It’s best to give the money to them annually, keeping in mind the annual gift-tax exclusion amount of $19,000 per child (or $38,000 given that you are married and do so with the agreement of your spouse).
Ideally, parents who wish to contribute to their children’s educations should set up tax-advantaged 529 savings accounts. The average tuition for an in-state four-year public college is roughly $24,000 and $54,000 for a four-year private school.
Americans owe approximately $1.6 trillion in student debt, a figure that has risen by more than 40% over the last decade. The average student-loan balance in the U.S. hovers at around $38,000, so your gift will be able to help with a significant chunk of that.
In addition to the annual exclusion limit, the Internal Revenue Service waives the gift tax for gifts that are used to pay tuition expenses, SoFi says. There’s no limit, “but the caveat is that you have to give the money directly to your student’s school.”
Your suggested amount will give them enough to ensure your children appreciate the value of their education and the value of a dollar.
“Submitting the Free Application for Federal Student Aid (FAFSA) is a critical step when it comes to getting federal student aid,” it adds. “When a student is considered a dependent student for FAFSA purposes, parents have a large role in the application process.”
“Footing college bills these days often takes every source of potential funding available to a parent, and there may be no better place to start than by opening and contributing to a 529 savings plan account,” Fidelity says.
“The restrictions are few, and the potential benefits can be significant for the account holder, including certain tax advantages, potential minimal impact on the financial aid available to the student, and control over how and when the money is spent,” it adds.
What’s more, saving money for college can also have an impact that goes far beyond any monetary value, according to this study by the Center for Social Development at Washington University in St. Louis.
“Designating small amounts of money for school,” can increase the odds that students of various income groups ever enroll in college, it found. In other words, there are cumulative, perhaps incalculable psychological effects, of having a 529 account in the first place.
Your suggested amount will give them enough to ensure your children appreciate the value of their education and the value of a dollar. But they will need to make up the difference and, without making a dent in your retirement plans, they should, all going well, stay motivated.
The Moneyist regrets he cannot reply to letters individually.
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