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Advice for Franchisees Saving for their Kid’s College; Education Bubble

Are you a franchisee thinking about how to best fund college for your children? Your research will quickly lead you to 529 plans, and in my opinion and experience as a purchaser it is probably the best option for college savings. You will also hear about Coverdale Education Savings Accounts but for tax complications and low investment levels it is probably more trouble than it is worth.

529 Plans are sponsored by states and enable USA-citizens to save after-tax money in an investment account that will accumulate earnings tax free and withdrawals are tax free if used to pay defined educational expenses. Some states offer small income tax breaks for investing in a 529 plan. For example, in Illinois:

Individuals subject to Illinois state income tax can deduct from their taxable income up to a maximum of $10,000 per year for contributions made toward the purchase of any College Illinois! Prepaid Tuition Program contract.* Married couples filing jointly can deduct up to $20,000 per year.** This state tax deduction reduces the individuals’ adjusted gross income (AGI) by the amount contributed up to $10,000 (or $20,000 for those filing jointly).

Contribution Limits

Contributions are included in the annual $13,000 exclusion from federal gift taxes for gifts made to any one person. But, unique to 529 plans, a contributor can give up to five times that amount ($65,000) in one year and treat that contribution as if it were made over five years for gift-tax purposes.

Fees; NY direct sold @ .17% is lowest in USA

You’ll have to do the math to see if the tax savings in the long run outweighs the higher fees of your state’s 529 plan. A benchmark to use is New York’s direct sold 529 plan which imposes a combined annual fee of .17% starting in March 2012, the lowest of any state right now. Investment options include a diverse and respectable range of Vanguard funds.

Prepaid Tuition – now too risky

I have previously recommended and have purchased myself 529 prepaid tuition plans, whereby a parent prepays tuition at todays value to protect against tuition inflation that has historically been over 5%.  The state prepaid plans generally have provision to pay out-of-state and private schools the same future value of the tuition. The state-sponsored prepaid college tuition programs were supposed to shift the investment risk from families to the government. But, many states now are struggling to make investment returns that keep up with annual increases in tuition and shortfalls are causing plans to turn into a Ponzi scheme. Some state bolster the appearance of safety like Florida who backs their plan with the full faith and credit of the state. Nevertheless, the program managers can and are starting to change the payout rules. You’ll have to research it.  I would only use a prepaid plan in combination with a 529 savings plan which YOU entirely control.

My main goal of this article was to provide some advice based on my experiences purchasing these plans over the  years. The recent development of the New York state 529 plan offering a .17% total fee is so enticing I had to share it with readers.

[EDITED May 20th, 2012 by FranchisPundit]

I’d like to respond to a some emails by adding perspective to this blog college, tuition, savings and jobs.

Two very successful entrepreneurs and billionaires, Peter Thiel and Mark Cuban, have written eloquently  on the education bubble issue and they believe student loan defaults will be as bad as the housing bubble as graduates can’t find jobs. See the links below for their provocative articles:

  • Peter Thiel, co-founder PayPal, hedge fund manager, early investor in many startups including Facebook.
  • Mark Cuban, co-founder of Broadcast.com acquired by Yahoo! for $5.9 billion, owns NBA’s Dallas Mavericks, Landmark Theatres, and Magnolia Pictures, and HDNet.

Their premise is that college degrees at expensive universities are a pseudo-scam. Students assume they can “flip” their degrees into a higher paying, more likeable job. So students in college trade 4 to 5 years of income, business experience, and pay for housing and room and board for a 50+% unemployment and underemployment rate. At many private schools the total combined investment can be over $75,000 per year.

Another side issues is if you sacrifice and save money for your kid’s college, the schools and government punish you because you have too many assets or income for need based tuition support.
The nobility usually associated with saving for college is eroded after considering some of these issues. As a parent, it is a difficult personal decision to allocate your extra cash to college savings for you kids, new business ventures, or retirement savings.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.


  1. Is there a tax advantaged program like 401k but for college savings where the employer can contribute?

    • Unfortunately not.

      I haven’t done the math though my guess is if you live in a state with a high income tax lthen you will probably be best served selecting an in state 529 plan as long as there is a corresponding income reduction for taxes.

      Alabama: 5% on income over $3,000
      Alaska: No income tax
      Arizona: 4.54% on income over $150,000
      Arkansas: 7% on income over $32,600
      California:10.55% on income over $1 million
      Colorado: flat 4.63% of federal taxable income
      Connecticut: 6.5% on income over $500,000
      District of Columbia: 8.5% on income over $40,000
      Delaware: 6.95% on income over $60,000
      Florida: No income tax
      Georgia: 6% on income over $7,000
      Hawaii: 11% on income over $200,000
      Idaho: 7.8% on income over $26,418
      Illinois: flat 3% of federal AGI with modifications
      Indiana: flat 3.4% of federal AGI with modifications
      Iowa: 8.98% on income over $63,315
      Kansas: 6.45% on income over $30,000
      Kentucky: 6% on income over $75,000
      Louisiana: 6% on income over $50,000
      Maine: 8.5% on income over $20,150
      Maryland: 6.25% on income over $1 millio
      Massachusetts: flat 5.3% on all income
      Michigan: flat 4.35% of federal AGI with modifications
      Minnesota: 7.85% on income over $74,780
      Mississippi: 5% on income over $10,000
      Missouri: 6% on income over $9,000
      Montana: 6.9% on income over $15,400
      Nebraska: 6.84% on income over $27,000
      Nevada: no income tax
      New Hampshire: 5% on interest and dividend income. Wages are not taxed.
      New Jersey: 8.97% on income over $500,000
      New Mexico: 4.9% on income over $16,000
      New York: 8.97% on income over $500,000
      North Carolina: 7.75% on income over $60,000
      North Dakota: 4.86% on income over $373,650
      Ohio: 5.925% on income over $200,000
      Oklahoma: 5.5% on income over $8,700
      Oregon: 11% on income over $250,000
      Pennsylvania: flat 3.07% on all income
      Rhode Island: 9.9% on income over $373,650
      South Carolina: 7% on income over $13,700
      South Dakota: no income tax
      Tennessee: 6% on interest and dividend income. Wages are not taxed.
      Texas: no income tax
      Utah: flat 5% on all income
      Vermont: 8.95% on income over $373,650
      Virginia: 5.75% on income over $17,000
      Washington: no income tax
      West Virginia: 6.5% on income over $60,000
      Wisconsin: 7.75% on income over $225,000
      Wyoming: no income tax

      • Another tax loophole for the rich. Why should I pay more in taxes so you can save for college? My kids paid their own way through school as it should be.

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