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Surprising Development: We Are Seeing Some Parents Choose Not To Save for College

Surprising Development: We Are Seeing Some Parents Choose Not To Save for College

| August 18, 2022

The jury is still out on if Covid, and the technology adoption it forced on families, may have broken the trend of climbing college costs. We do have some slivers of good news on that front. The cost of both public and private have just declined for the first time together in 30 years according to Arbor Data Science! But as you can see, it’s still quite costly. 

We observe, however, a new trend among young parents—some do not want to save anything for college. There are a variety of reasons why this is happening right now:

  • Mom and dad’s college costs vs. benefits did not pan out
  • Mortgage-sized college loan payments have left a bitter taste for so many millennials and Gen Xers
  • Parents aren’t sure if their child will need college to get a so-called “good” job
  • Families are fed up with exponentially increasing education costs and are reluctant to keep shoveling money into a savings fund (this one hits home with me!)
  • Perhaps some feel college will be free one day with the way government support is going

People often want to save for something. Maybe it’s a down payment on a house or a little nest egg to get them on the right financial footing early in adulthood.

Even if your child doesn’t attend a traditional college, saving in a tax-advantaged college savings plan might still be a savvy way to save and invest compared to alternatives like a typical savings account or taxable brokerage account.

Allison and I do both for our kids, thanks in part to generous family support. Our children’s taxable non-college accounts create potential tax liability and reporting each year and require more hands-on attention than the generally tax-free college savings accounts.

Believe it or not, college savings accounts are great for four reasons even if you don’t think your child will spend much money on a traditional four-year university experience.

It’s Simple. With today’s technology and low-cost investment world, you can establish an online college savings account with as little as $25 in about five minutes. The biggest challenge is just knowing your child’s Social Security number which comes about two weeks after birth. Another upshot is that you don’t have to do any complicated stock trading. All you must do is make one-time deposits or write out checks to the accounts—and that can be automated. What makes college savings accounts a breeze is that there are no tax impacts from dividends or capital gains as there are in a taxable brokerage account. That will hopefully help prevent you from needing to file a tax return for your child before he or she heads off to college.

It maintains control. The owners of the account are usually mom and dad. Maybe grandma and grandpa depending on your situation. That ownership structure helps ensure the account does not turn into a travel van fund for your kid when they turn 18. The money is there for whatever you want it to be used for. Period. You as the adult have complete control even if the child does not go to school immediately.

It avoids taxes. Distributions to pay for costs related to college, trade schools, studying abroad, attending high school, junior high, elementary school, and even private school can all be tax-free!

It is still available for other things. If you want to allow the child to use the funds to make a down payment on a home, you can withdraw all the contributions completely free from taxes. You would only owe income taxes on the gains plus a 10% penalty, so it’s not catastrophic if you use the account for expenses other than college. And it provides some benefits along the way.

The Bottom Line

You love your kids and grandkids. They will almost certainly need some financial help and would benefit from a college savings account. It might be an effective way to save for their future depending on your circumstances.

Thanks for taking a look. Please let us know if you would like to discuss this information, and how it applies to your family’s situation.