Self-Directed Education Savings Accounts: Help Your Child Avoid Student Loan Debt

If you are searching for options to help finance your child’s college education, Advanta IRA has a potential solution to help your child avoid student loan debt. We are referring to self-directed education savings accounts, which allow you to choose the assets for the plan based on your own knowledge of different assets. You’re able to use alternative investments (real estate, private lending, private equity) to build wealth in the account. And, doing so can increase the earning potential of the education plan at a faster pace than traditional stocks and mutual funds.

Interested? Read on as we cover a few stats on student loan debt and explain how education savings accounts work, especially when they are self-directed.

The Cost of Higher Education and Living Expenses Thereafter

As the cost of higher education continues to rise, so does the weight of student loanMale and female college students sitting at desks in a sunny classroom listening to their professor review the day's lesson. debt. According to Pew Research Center, as of March 2019, Americans owe approximately $1.5 trillion in student loans, with the majority of this debt owed by young adults ages 18-29.

As daunting as it seems, if young adults want to be successful, they need education beyond high school. Young college graduates are more likely to have higher earnings later in life than those without a bachelor’s degree. If a high school graduate chooses not to further their education in some way, they will become part of the unskilled workforce in this country. We are not trying to minimize the place for unskilled workers at all. But, with the federal minimum wage at $7.25/hour, research shows that it’s nearly impossible to survive on minimum wage in the United States. Some states have a higher minimum wage. But, check out a living wage calculator to see the reality of the income needed to survive in today’s world whether single or married with children. The struggle for many is real.

The best chance for a young adult may mean going to a traditional 4-year college, junior college, or technical school. If future education expenses aren’t made by parents contributing to some type of education savings plan starting when the child was born, this could mean incurring debt that the student isn’t thinking about when they take out the loans.

Over the past 12 years, interest rates have ranged from 3.4 percent to 7.90 percent, depending on the loan, and rates have been rising since 2016. The 2019-2020 federal student loan interest rate for direct subsidized and unsubsidized loans (undergraduate) is 4.53 percent, while direct unsubsidized loans for the graduate or professional is 6.08 percent, plus loan fees.  If a parent needs to take additional loans to help the student pay for their college education, they are looking at 7.08 percent for a Direct PLUS Loan.) YIKES!

How Self-Directed Education Savings Accounts Can Help Avoid Student Loan Debt 

To help your child succeed, plan to start early. The Coverdell ESA allows up to $3,500 in 2019 of after-tax contributions to be made in your child’s name until the their 18th birthday.

These funds can grow tax-deferred, and you don’t have to pay tax on any annual growth of the investment. And, unlike 529 plans, Coverdell ESA funds can be used for qualified K-12 expenses as well, such as tuition, computers and laptops, books, supplies, tutoring, and transportation without penalty of early withdrawal.

A self-directed education savings account can potentially grow funds a bit faster than traditional investing. Self-directed accounts allow investments not available in other plans.

With 529 plans, you must choose from the investments offered. However, the alternative investments available in a self-directed ESA range from gold, rental property, private loans, startups, cryptocurrency, private equity, and so much more.

What if your child decides not to further their education after you’ve build considerable funds in a self-directed education savings account? If the money isn’t used by the time they’re 30, it must be given to them directly or rolled over into another Coverdell ESA for another family member. If there is not another family member who can use the funds—you’ve still built your child quite a nest egg, which can give them a leg-up in life as they are starting out.

To learn more about how self-directed ESAs work, please contact Advanta IRA. Our team is happy to speak with you about the benefits and explain how alternative investments have the potential to grow your retirement plans, as well.

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About Scott Maurer

Scott is an attorney and a graduate of the University of Florida Law School. Scott started his career with Advanta IRA in 2006. His experience with various investment types and their unique processes makes him an invaluable asset. Scott holds the designation of Certified IRA Services Professional (CISP) and leads engaging seminars and webinars that educate the public on the intricacies of self-directed IRAs.