The kids are alright – how to fund a college education
They say that in life that the best things we can give our
children are love and a good education. Love money can’t buy, education it can. In broad terms we estimated that sending a child to college costs a minimum of €1,200 per month, or €33,000 in total over the course of a three year degree.
This figure does not allow for a particularly lavish social life. Whilst funding your child’s “student lifestyle” may not be at the top of your priority list, it has been shown that having a certain level of disposable income is healthy for students as it removes stress and allows them to focus on their studied. With this in mind we would consider a figure of €1,700 - €2,000 an appropriate budget. This translates to €46,000 to €54,000 over the same three year degree course.
Whilst many will look to fund it on a pay-as-they go basis it may prudent to accumulate this over a period of time. So what will it cost to build this nest egg? In calculating the funding figure I have made a number of assumptions around investment growth, inflation and other factors.
We are assuming funding starts when a child is 3 years old with the child leaving for college at 18, this gives a 15 year time horizon. To accumulate the basic €33,000 figure, we estimate that you need to invest €145 per month or to aim at the top end of the spectrum of €54,000, €240 per month should suffice.
Are there tax implications of passing this money on to a child? Will a CAT liability not arise? There are two taxation aspects to consider in this regard. Firstly, should you accumulate the money in your own name then draw it down piecemeal to provide for the child, this will be exempted from the charge of CAT or an erosion of the child’s lifetime limits however, it is important not to be seen to be abusing this exemption. Revenue has provided clarification on this recently (external link). In the example above, given the young adult’s age, the nature in which the money is passed and the purpose for which it is used you will not fall foul of the tax man. We would suggest that a record should be kept in this regard and that it may be imprudent to pass the full amount as a lump sum at the commencement of the child’s education.
The second option is to invest the money in a trust structure taking advantage of the “Small Gift Exemption”. This exemption allows you to pass €3,000 a year from each parent to the child. By placing it in trust the beneficial ownership of the money passes to the child however you can maintain control of things such as investment choice until the child reaches a stage in life where this can be passed on. This can be a clean and easy method of funding for education however, it may be wise to use the small gift exemption as an efficient wealth transfer measure whilst concurrently funding for education purposes as above.
How should this be structured? The most appropriate structure will be dependent on your broader planning. Efficient structuring can generate considerable efficiency both from an investment and tax perspective. Many well meaning parents simply place money into a savings account “earmarked” for their child’s education. Whilst this may be a first step, it is invariably a poor solution.
In the scenario above we are considering a 15 year time horizon hence it is incumbent on the parent to at least plan to match or outrun inflation in the period to maintain or grow the real value of their wealth. To take a very simple example; should you have €100 today and should inflation run at 2% a year over the next 15 years (the ECB’s target rate), your €100 will have been eroded in real terms by inflation to the equivalent of €75 today! That’s ¼ of your real value gone!
The sums involved in this type of planning can be very modest, at the lower end of the spectrum, many parents start by allocating their child benefit and hence not taking a deduction from their take home pay. At the other end of the spectrum, the sums involved may be larger but still modest, if you are to consider accumulating an education fund and using the small gift exemption as a wealth transfer planning measure you will perhaps be looking at €250 per month per child.
Whilst these are modest figures in the immediate term, from small acorns great oaks grow and the outcome of a happy and well educated child is surely beyond the purely financial.
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