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Each situation is different and this article was written for informational purposes only and the opinions mentioned here do not constitute financial advice.
Coming from France, it is difficult to imagine that financing your children studies in the US can potentially represent large amounts of money. Some parents want to pay the full cost of the college while others cannot afford it or prefer not to pay for it. In any case, it is useful to know the options.
Community or junior college: on average, community college costs $3,350 / year for a total of two years, after which students can transfer to a university for their final two years. This is an interesting option for families who don’t have the means to pay a university tuition for the full four years, or when your child is not accepted by a university directly out of high school.
College: college in the United States is four years to earn a bachelor’s degree. Below is the cost of different types of college. The cost includes the tuition, room and board, food, transportation and equipment needed (books etc).
- Public college (state resident): $25,000/year, $100,000 for 4 years
- Public college (resident of another state): $41,000 / year, $164,000 for 4 years
- Private college: $51,000 / year, $204,000 for 4 years
Keep in mind that these are the current costs. They increase by 5% / year on average. Here is a prediction of the costs 10 years from now:
- Public college (state resident): $40,700 / year, $162,800 for 4 years
- Public college (resident of another state): $67,000 / year, $268,000 for 4 years
- Private college : $83,000 / year, $332,000 for 4 years
As you can see, It’s better to save as soon as possible if you want to pay for all or part of your children’s college education.
Let’s review the different funding opportunities.
UGMA and UTMA accounts
These accounts were created in the 50s and 60s. They allow you to set aside a certain amount of money and invest it in mutual funds, bonds, or stocks. The money will then grow tax-free, provided that the capital gains are less than $2,100. Between $2,100 and $10,500, you will have to file a tax return for your child or in some cases, you can add the capital gain to your tax return. Be careful, this account belongs to your child and (s)he will have full access to it at age 18 (or 21, depending on the state). Also, it will impact the student eligibility to financial aid. For that reason and the fact that the sum of money is relatively small, this isn’t the ideal account for paying for education expenses.
The famous 529 account! This is probably the most common and well-known vehicle for saving and financing for a child’s education in the US. Here are the important details:
- You can contribute $15,000 per parent, per year, per child without declaring anything and without exceeding the lifetime limit of the gift tax (which is $11.4 million). That means $30,000 total per child per year given two parents.
- Alternatively you could contribute $75,000 ($150,000 for both parents) all at once provided you do not contribute for the following 5 years.
- The money you withdraw could also be used to pay for tuition at any primary or secondary private schools (limited to $10,000 per child and only for tuition).
- In some states, you can deduct all or part of your contribution from your income (this is not the case in California for example).
- Capital gains from investments in a 529 are not taxed if the money withdrawn is used to pay for “qualified” expenses. For more details, read here: https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan.
- If you withdraw money for non-qualified expenses, capital gains (NOT contributions) will be taxed as income with a penalty of 10% on these capital gains.
- If your child is awarded financial aid, you can withdraw the corresponding amount without penalties but still be taxed on capital gains.
- If you have money left in your 529 account once your child has finished college, you can transfer it to another beneficiary (number 1 applies)
The case of 529 for French people in the United States
The question that often comes up with my clients is whether or not to open a 529 if they are not sure whether their child will go to college in the US.
Unfortunately, I do not have a definitive answer to this question because it depends on several factors. But, I will present you some elements that will guide you in your reflection:
- What is your philosophy? Do you believe that college should be free and your children should not have to pay to go there? Or, do you prefer that they apply for loans or work to pay for their education?
- Are you on track for your retirement? While you can apply for loans or financial aid for college, you cannot apply for a loan for your retirement.
- Were your children born and raised in the US? If so, it is less likely that they will want to go to France for college.
- American colleges are still the most well-regarded in the world.
- The 10% penalty in case of withdrawal can be relatively small in dollar amount compared to the total sum. For example, investing $50,000 over 10 years with a return of 6% in a 529 will bring you to $90,000 (round up) in capital, that’s $40,000 in capital gain – so the penalties will only be $4,000.
- You want to have maximum flexibility and freedom.
The IRA and the Roth IRA
Yes, it is possible to withdraw money from an IRA or a Roth IRA without penalties for qualified college expenses. That way you contribute to your retirement and for the education of your children at the same time.
- For an IRA, you will pay taxes on the entire amount you withdraw.
- For a Roth IRA, you will pay taxes only on capital gains.
See point 2 in the previous section, if you are on track for retirement, using funds from an IRA or a Roth IRA to pay for education expenses is possible, but has significant retirement consequences. Consult a professional before making a decision like this.
Grandparents and the rest of the family.
One possibility is to ask grandparents or other family members to help. They may pay all or part of certain expenses directly to the college according to the same rules as 1 and 2 (see 529 Account, first section).
Finally, one last possibility is to apply for student loans. There are all sorts of student loans and they depend on the type of college you are going to, the state you reside in, your potential income, and several other criteria.
In conclusion, depending on your philosophy, you need to think now how you will be financing your children studies in the US. In general, a combination of these different options will give you some flexibility whether you decide to return to France or not.
Guillaume Decalf Oui Financial
After a 15-year career in Tech, including 8 years in the United States, Guillaume switched careers by obtaining his Financial Advisor’s License and starting Oui Financial, a firm specialized in financial planning and investments for French people in the United States. He is based in San Francisco, California but serves clients throughout the US.