Taking Advantage of the Hazlewood Act, 529 Plans, and UTMA's to Save for College
Veterans in Texas should check out if they qualify for the Hazlewood Act exemption for public higher education. If so, they should take advantage of this unique education benefit to help pay for the costs of college in a public university in Texas.
Essentially, the Hazlewood Act is a State of Texas benefit that provides qualified veterans, spouses, and dependent children with an education benefit of up to 150 hours of tuition exemption, including most fee charges, at public institutions of higher education in Texas.1 What is noteworthy is that it does not cover living expenses, books, or supply fees. The fee is an exemption, so no money changes hand. The student essentially does not pay any tuition and fees when enrolled.
Many veterans who qualify can assign or transfer unused hours of exemption eligibility to a child under certain conditions to use their 150 hours of benefits. This is called the Child (Legacy) act. There are several different requirements, but the main ones are:
- Be Texas resident;
- Be a veterans child; and
- The child must be 25 years old or younger
Although this benefit will cover tuition and most fees, this, of course, is not the total cost of college in Texas. For example, if we examine the cost of attending Texas A&M in College Station for the 2021-2022 academic year, we have $13,012 for tuition, but there is much more.2 The estimated total cost of attendance as an undergraduate student at College Station is $31,428. So as you can see, even if you qualify for the Hazelwood exemption, you still have much more money to cover. Unless the child lives at home, this is an expensive bill to pay! At Texas A&M, we have housing and meals for $11,400, books and supplies are estimated to cost $1,000.2
These expenses are about half of the cost of college that needs to be budgeted. What is often recommended is to save for these additional expenses through a 529 college savings plan. With 529 plans you can use the money you saved to pay for qualified education expenses such as room and board, supplies, and books, which the Hazlewood Act does not cover. You can choose any 529 plan offered in the U.S. and are not obligated to enroll in the one provided by the State of Texas. Some state plans provide an income tax reduction, but Texas does not have an income tax and therefore does not provide any monetary incentives for participation in its 529 plan. In a 529 plan you contribute after-tax dollars, but the money grows tax-free and is free of income tax if used for qualified education expenses.
You could also save money in a Uniform Transfers to Minors Act (UTMA) custodial account, which can be used to cover expenses not covered in the 529 plan, such as travel and personal costs of the student. A UTMA account is essentially a brokerage account that the parent enrolls in, and the child is considered the beneficiary. The adult acts as the owner, or custodian, of the account until the child reaches the age of majority in their state. At that point, the child can access the funds and use them without restriction. The account becomes the child's at age 18 in Texas. But unlike 529 plans, UTMA can be used for any expenses. So a parent could save at least some money in a UTMA to cover the costs not covered by your 529 plan. But this account is taxed every year (just like a brokerage account) and can impact financial aid for the child since the account balance in the UTMA will be listed as the child's asset when applying for financial assistance. In addition, contributing too much money each year can impact gift taxes and income taxes, unlike 529 plans that grow tax-free.
This combination of Hazelwood, 529, and UTMA's are powerful options to help cover the total cost of college and take advantage of the veteran's benefits you are entitled to. Reach out to me below, and we can talk more about how to take full advantage of the unique options in Texas to pay for college expenses and how to fund these types of accounts to fund perhaps the most significant expense besides your family home.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.