Funding your child's higher education need not be the financial headache many parents dread. Planning ahead is key, and many expatriates are even eligible for government-sponsored schemes.
An academic portfolio for your children
Luke and Cynthia Beermann of Dubai are prototypical expats who have spent the last 15 years trotting the globe, accumulating countless memories and a healthy nest egg along the way. Their daughter, Hannah, 12, has lived in five countries and is an A student at the American School in Dubai. But until recently, the Beermanns had given little thought to how they would pay for her college expenses. "I think we are ahead of the game compared to many people," says Mrs Beermann.
"And yet we are still worried." That panic, familiar to many parents, was magnified by the financial tremors that shook the Gulf, and the rest of the world over the past year. "For the first time, I actually knew kids who couldn't go anywhere they wanted because the parents could not afford it," says Mrs Beermann. Therefore, the couple resolved to incorporate their college savings into a comprehensive investment plan. It's a wise move for all parents, whether they consult a professional adviser, as the Beermanns did, or opt for a do-it-yourself approach. The key is to get started as soon as possible.
"It's like climbing a mountain. The longer it is planned, the easier the climb," says Alwyn Owens, a senior consultant with Holborn Assets, a financial advisory firm based in Dubai. For Americans like the Beermanns, the best vehicle for reaching their goals is often a 529 plan. A 529, so-called after the relevant portion of the Internal Revenue Code, is a tax-friendly plan specifically designed to encourage saving for college expenses.
There are two types of 529 plans: prepaid plans and savings plans. A prepaid plan is essentially a hedge against inflation, as it allows parents to buy tuition credits for future use at today's prices. This is no small thing, as for the past 50 years the cost of tuition in the US has increased at an average annual rate of almost 8 per cent, nearly twice the pace of inflation. A 529 savings plan is more of a conventional investment vehicle, with the advantage that the earnings accrued in the account are not taxable as long as they are used for the beneficiary's eligible expenses, which usually include tuition, housing, books and computers.
All 50 states in the US sponsor a type of 529 plan, typically offering reduced tuition for public universities in those states. There are also broker-sold plans that are almost always of the savings type. Whatever the variety, "the bottom line is, there is really nothing better" than 529 plans for college savings in the US, says Vince Truong, an adviser in Dubai who has earned the certified financial planner designation offered in the US. Mr Truong is advising the Beermanns to consider a 529, and is helping the couple to understand its complexities.
One loophole available to US expatriates is that anyone can establish and contribute to a 529 plan for a child. This is important, because not all expats maintain residency in the states, meaning they would not qualify for the state-run plans However, a grandparent, other relative or even a friend can set up a plan on behalf of a child. This approach comes with an added benefit. When the child begins to apply for financial aid, the university will not consider the assets in the 529 plan as part of the family's financial need if the account is not in a parent's name, Mr Truong says.
However, a 529 is not without its pitfalls. One key thing to remember is that any money withdrawn from a 529 plan and not used for college expenses is subject to a 10 per cent penalty. It's also important to pay attention to the fees involved, as some broker-sold plans charge hefty fees, which create a drag on earnings. Further, an account holder can only change the investment options once each year, so it is difficult to adapt to market conditions.
In the UK, by comparison, there is not a structured mechanism devoted to college savings. This is because, historically, students who qualified for university were exempt from tuition fees, a tradition that has come to an end in the past decade (Scotland excepted). And with governments and universities increasingly strapped for funding, the burden is shifting even more to students and their parents.
"We are moving inexorably towards the US model," says Andrew Clare, a professor of asset management at the Cass Business School in London. Like other experts, Mr Clare says British parents should employ an investment mix similar to one they would use for their own retirement - one that starts rather aggressively when university is more than 10 years out and gets progressively more conservative as commencement approaches.
By the time the child is within a couple of years of university, the investments should be almost entirely in bonds and other assets that are not subject to wild market fluctuations. Mr Owens, with Holborn Assets in Dubai, says he encourages his clients in this situation to look at a selection of offshore funds that can offer British citizens considerable tax advantages (offshore investing for Americans is significantly more fraught with peril).
One option he suggests for clients is the Vision Plan, offered by Generali International out of Guernsey, because it offers more than 80 types of funds and investors can shift among them as their priorities and circumstances change, Mr Owens says. Canadian parents overseas are in much the same situation as British, in that their college savings efforts need to be largely self-directed. The government offers residents the opportunity to invest in a Registered Education Savings Plan (RESP), which is similar to the US 529 in that it enables earnings to grow tax-free.
However, Canadians who are non-residents are not allowed to contribute to a RESP. One solution is to have grandparents or other relatives establish the fund, as anyone can set one up as long as the beneficiary is related by blood or adoption. If the parents return to Canada at any point, they can start a separate RESP and transfer all assets from the other account, provided the beneficiary remains the same.
The Canadian plan is also arguably more generous than the US because the government will match a portion of the first $2,500 invested each year. Withdrawals are taxed in the name of the student. Since most students have little or no income, the earnings are generally tax-free, or close to it. @Email:firstname.lastname@example.org