September is National College Savings Month. Have You Considered Self-Directing an Education Savings Account?

Published on September 9, 2021

With classes underway in colleges and universities across the country, families are reminded of the importance of saving for college, to make higher education available for their students. September is National College Savings Month, which puts researching college savings plans at the top of many families’ to-do lists.

According to Salle Mae’s report on how American families pay for college:

• Families report paying $26,373 for college in academic year 2020–21
• Scholarships were used by 56% of families and covered 16% of education costs in academic year 2020–21
• More families (56%) report making loan payments while the student is still in school—a significant increase from last year’s 46% of families, and 41% of families two years ago
• FAFSA completion rates are declining

Completing the Free Application for Federal Student Aid (FAFSA) qualifies millions of students for scholarships, grants, work study programs and federal student loans every year. However, given the high cost of higher education and the many expenses related to attending college, an education savings account (ESA) is an excellent way to save for post-secondary education. Even better, an ESA can be self-directed, enabling the account owner to boost those savings by investing the funds into alternative assets.

ESA 101: what it is, who can open one, who benefits

Similar to a Roth IRA, contributions to an education savings account grow tax free and distributions are also tax free for qualified education expenses—if they do not exceed the beneficiary’s qualified education expenses. In other words, the funds must only be applied to qualified expenses (noted below).

When applying for financial aid for school, the assets held within a self-directed ESA are treated as those of the account owner (not the student).

Here are some ESA fast facts:

• Anyone can establish an ESA for anyone who is under the age of 18. Next Generation includes education savings accounts among the many self-directed plans available.
• The maximum contribution limits (from all sources—parents, other relatives, friends) is currently $2000 per year per account; while there is no limit to the number of education savings accounts a single student/beneficiary can have, the cumulative annual contributions must stay within the $2000 limit. Therefore, if the account is opened when the child is born, this gives him/her the opportunity to start college with up to $36,000 to cover expenses.
• The funds may be used for private elementary or high school (K-12) as well as post-secondary education (college, trade school). Qualified expenses can include tuition, books, school supplies and equipment (such as a computer for school), certain fees, room & board, and even uniforms.
• The beneficiary must use the funds before age 30. If that doesn’t happen, assets are distributed to the beneficiary at age 30, at which time the account is assessed taxes and penalties. Note that there are certain waivers for students with special needs. Should the student not use all the funds available in the ESA, or if the student’s school plans change, the account holder can transfer the plan to another beneficiary without any fees or penalties.

Investment flexibility

Unlike other college savings instruments, an education savings account allows for greater flexibility in terms of how the assets are invested. And that’s good news for individuals who prefer to self-direct their plans. Rather than being limited to investment options such as stocks, bonds, mutual funds or CDs, investors who are knowledgeable about certain nontraditional investments can include alternative assets like real estate, private equity, lending, cryptocurrency, precious metals and more.

The team at Next Generation can provide education about these and other self-directed ways to save, such as using self-directed IRAs for retirement and building generational wealth. You may schedule a complimentary educational session with us to learn more, or contact Next Generation directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.