Sponsored content by Guillaume Decalf from www.ouifinancial.com. First of all, each situation is different when it comes to financing the education of your children, especially in the USA. This article was written for informational purposes only and the opinions mentioned here do not constitute financial advice.
Coming from France, it is hard to imagine paying a large amount of money to send your children to a university. Some parents want to pay the full cost, while others may prefer or may only be able to pay a part. Either way, it’s worth knowing your options for financing your children’s education in the United States.
Average costs of an American university in 2021
Community or junior college: with an average cost of $ 3,350 / year and the possibility after two years of being transferred to the 3rd year in a traditional university, it is an interesting option for families who cannot afford to pay or could not enter, in a traditional university.
College: The university in the United States lasts four years. Below is the cost of the different types of universities. The cost includes the university itself, the university room, food, transport, and necessary materials (books, etc.)
- Public college (state resident): $ 27,000 / year or $ 108,000 for 4 years
- Public college (resident of another state): $ 43,000 / year or $ 173,000 for 4 years
- Private college: $ 55,000 / year, $ 220,000 for 4 years
Keep in mind that these are the current costs. They increase by 5% / year on average. Here is an estimate of the costs in 10 years:
- Public college (state resident): $ 40,700 / year, $ 162,800 for 4 years
- Public college (resident of another state): $ 67,000 / year, $ 268,000 or for 4 years
- Private college: $ 83,000 / year, $ 332,000 or for 4 years
So it’s best to put some money aside as soon as possible if you want to pay for all or part of your children’s college.
Let’s review the different funding possibilities.
UGMA and UTMA accounts
These accounts were created in the 1950s and 1960s. They allow you to set aside a certain amount and invest in mutual funds, bonds or stocks. It will then grow tax-free… provided the capital gains are less than $ 2,100. Between $ 2,100 and $ 10,500, you will have to file an income tax return for your child, or in some cases you can include it in your own return.
Please note, this account belongs to your child and there will be full access at 18 or 21 depending on the state. It will also be taken into account in calculating the scholarship he may obtain. For this reason and the fact that the amount to set aside is small, it makes more sense to open other types of accounts.
Account 529
The famous 529 account! This is the most common and probably the best-known account for saving and financing your children’s education in the United States. Here are the main features to know about this account:
- You can put $ 15,000 per parent, per year, and per child without declaring anything. That means $ 30,000 in total per child per year.
- You can put up to $ 75,000 ($ 150,000 for both parents) at one time as long as you stop contributing for 5 years.
- The money will be able to pay for a private school, not just for the university (limited to $ 10,000 per child and only for tuition).
- Depending on the state, you can deduct the contribution from your income (this is not the case in California, for example).
- Capital gains on investments in a 529 are not taxed IF the money withdrawn is used to pay for “qualifying” expenses. You can view the list on this site https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan.
- If you withdraw the money for unqualified expenses, capital gains (NOT contributions) will be taxed as income plus a 10% penalty on those capital gains.
- If your child obtains financial aid, you will be able to withdraw the corresponding sum without penalty but still being taxed on capital gains.
- If you have money left on your 529 after your child has finished college, you can transfer it to another beneficiary (note point 1 applies).
- Some universities outside the United States accept 529. Here is the list (enter “foreign country” in the “State” field).
The case of 529 for the French in the United States
The question that comes up often with my clients is whether or not to open a 529 if they don’t know where their kids are going to go to college. Unfortunately, I don’t have a definitive answer to this question because it depends on several factors. Do not worry! Here are some elements that can guide you in your reflection:
What is your philosophy? Do you assume that university should be free?
- Do you think that your kids shouldn’t have to pay to go? or do you prefer him to work to pay for studies and/or make loans.
- Are you on track to fund your retirement? While it is possible to have financial aid and student loans to go to college, it is not possible to have them for your retirement!
- Were your children born and growing up in the United States? If so, the dominant environment is American and there is little chance that he will decide to go to France for all of their studies.
- American universities are still among the most reputable in the world.
- The 10% withdrawal penalties can be relatively small in dollar terms compared to the total amount. For example, placing $ 50,000 over 10 years with a 6% return in a 529 will net you $ 90,000 (round up) or a return of $ 40,000, so the penalties will be $ 4,000.
- You want to have maximum flexibility and freedom.
The IRA and the Roth IRA
It is possible to withdraw money from an IRA or Roth IRA without penalty for qualifying academic expenses. You are therefore contributing to your retirement and for the education of your children at the same time.
In the case of the IRA, you will pay tax on the entire amount you withdraw. In the case of the Roth IRA, you will only pay tax on capital gains.
See point 2 in the previous section, if you are on the right track for your retirement, it is a possibility but it has very important consequences for your future. Consult a professional before making a decision like this.
Trading account
This is the one that is the most flexible. You can open a dedicated brokerage account to pay for your children’s college. Be careful, you will have to secure it as you approach the date of the university. This is what I do for some of my clients who have money under management with me.
Grandparents and the family in general
One possibility is to appeal to grandparents or other family members. They can pay all or part of certain expenses directly to the university according to the same rules as points 1 and 2 (of the first part of Account 529).
Grants and financial aid
I advise my clients to consult a specialist who will help them understand the different possibilities that exist in this matter.
Student loans
Finally, the last possibility is to make student loans. There are all kinds and they depend on the type of university your child goes to, the state you live in, your income potential, and many other criteria. It would take too long to list all the possibilities in this article.
In conclusion, whatever your philosophy, you need to think about the different scenarios now if you want to finance your children’s studies in the United States. In general, a combination of these different possibilities will give you some flexibility whether you decide to return to France or not.
Guillaume Decalf from www.ouifinancial.com – info@ouifinancial.com
After a 15-year career in the technology sector, nine of which in the United States, Guillaume changed careers by obtaining his license as a financial advisor and creating Oui Financial, a company specializing in financial planning and investments for French and Franco-American families in the United States. He is based in San Francisco, California, but serves clients all over the United States.
MerciSF is not responsible for the material contained in this article.
