As more and more free higher education opportunities become available, does it make sense to save for your children’s college anymore? And if you do, what happens with the money if they don’t use it for college?

 

Last month, my brother commented to me that he thinks it’s pointless to save for his kids’ college. He thinks that by the time they are old enough it will all be free. Then, I was listening to a podcast for financial advisors and a highly successful, well-known advisor who has been practicing since the 1980’s said, “If you’ve got a client with a five-year-old kid, you don’t have to worry about saving for college for that kid because, by the time the kid goes to college, it’ll probably be free. It’s already free in so many areas now.”

 

It got me thinking. The higher education landscape is definitely changing in our country. I have personally taken advantage of some of the more cost-effective changes. But, everything free in 13 years? Will it change that radically and that fast?

 

What Do The Professionals Say?

I posed the question to some other financial professionals. While most agree that change is coming, there is little consensus as to what that change will look like. Even if there are free options available for our kids to earn their degrees, there will most likely still be more prestigious options with a price tag.

 

We already have that paradigm with community colleges vs. universities. Community colleges are a much cheaper way to earn the first half of a Bachelor’s degree. But do people avail themselves of the opportunity? Not as much as they should. And it’s not just people who can afford it that choose the more expensive educational route. There is a reason 44 million Americans have student loan debt totaling $1.48 trillion. Most people aren’t willing to take the most affordable option when it comes to higher education.

 

Most financial advisors agree that, since no one really knows what the future holds, it is unwise to expect your kids to go to college for free. In light of that, they still recommend that you save towards your kids’ college.

 

What Happens If You Don’t Need Your College Savings?

But even if free college is a myth, your kid could still earn a degree without tapping into your savings. What if your daughter earns a full-ride scholarship? Or just goes to a really cheap school?

 

Even if you save for college, that doesn’t guarantee that your kid will actually go. What if your son decides to forego college to become an electrician? Or becomes disabled and cannot attend college? Or even passes away?

 

What happens with the college fund then?

 

529 Plans

If you are saving for college with a 529 Plan, there are several options if the intended beneficiary doesn’t use all of the funds.

 

First, you can simply change the beneficiary. Maybe your son got a scholarship but you’ve always wanted to go back and get your MDiv. Just change the name on the account to yours. Or if he becomes an electrician, just wait until he has kids and transfer the account to one of their names. They could even use it to pay for a private K-12 school. You can change the beneficiary of the account to almost any family member, but if you skip generations it could have tax consequences.

 

If your child earns a scholarship, you can withdraw up to the amount of the scholarship from the account without having to pay a penalty. And you can use that money for anything. However, you will have to pay income tax on the gains.

 

You can also withdraw the money penalty-free if your child dies, becomes disabled, or attends a US military academy. If you really need the money and you can’t pass it on to someone else, you will have to take non-qualified withdrawals. Since you put the money in after paying taxes on it, the principal won’t be affected by non-qualified withdrawals. However, you will have to pay a 10% penalty and income taxes on the gains.

 

Coverdell Education Savings Account (ESA)

The rules for a Coverdell ESA are almost the same as a 529 Plan, but with one big difference. Whereas there is no age limit for the use of 529 funds, ESA accounts must be emptied by the time the beneficiary reaches age 30 (unless they have special needs). Once the beneficiary reaches age 30, the funds will be distributed and penalized.

 

Like with the 529 Plan, the penalty is 10% for non-qualified withdrawals and the gains are subject to regular income taxes. To avoid taxes and penalties, the funds can be rolled over into a family member’s ESA (or even into a 529 Plan). Also like the 529 Plan, there is no penalty for beneficiaries who receive a scholarship, go to a US military academy, become disabled, or die.

 

Should You Save For College?

So, if you can afford to, there’s really no compelling reason not to save for college. You should have no problem finding qualified expenses to spend the money on. And, if the kid you had in mind doesn’t use it, you’ll most likely be able to find another family member who can.

 

Even if college is free in the future, it’s not like the government is going to confiscate your college fund. The money is still yours. Only the gains (which is money you don’t have right now) will be penalized if you take it out for non-educational reasons. My advice is to go ahead and save.

 

If you want to learn more about the different college savings accounts available to you, read How To Get The Most Out Of College Savings.

 

If you have an account, but aren’t sure how to invest the money, read How To Choose Investments For Your College Savings.

 

If you can’t afford to save, but want your children to attend college, read 3 (Free) Ways To Have An Affordable College Experience.