Most parents raise their children thinking/hoping that they will want to attend college, as most careers today that do not rely solely on manual labor usually require some sort of college degree. What does attending college mean today? Students have many options ranging from a full on campus experience, to part online, to full online, specialty degrees, junior college, and more. But there is one thing in common; in the United States a secondary degree is not free. The prices of a four-year school vary greatly; the most expensive colleges today are elite private colleges averaging around $68,000 per year. While the rate of increase in college costs has slowed, the price is still going up. Forbes estimates that if your child is going to college in 2018, the projected cost of an elite college from 2018-2021 could be as high as $334,000.
The College Board: Average
| Tuition, Fees, Room & Board | Public 2 Year In- District | Public 4 Year In-State | Public 4 Year Out-of- State | Private Nonprofit 4-Year |
|---|---|---|---|---|
| 2016-17 | $11,580 | $20,090 | $35,370 | $45,370 |
| 2015-16 | $11,370 | $19,570 | $34,220 | $43,870 |
| $ Change | $210 | $520 | $1,150 | $1,500 |
| % Change | 1.8% | 2.7% | 3.4% | 3.4% |
With costs like these parents need to consider all avenues for paying for college from financial aid, grants, scholarships, subsidized loans, etcetera. Often these options are not enough, or will leave your child wrangled with debt the day that they graduate. For these reasons, parents need to start saving as soon as possible, and save as much as they can budget. You also want be smart about saving and take advantage of some of the programs the government has created:
529 Savings Plans: A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. Each state enforces a specific total contribution limit, generally between $300,000 and $500,000 and often have tax benefits at the state level for in-state residents.
The 529 plan offers special tax benefits, earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings.
With every state offering a 529 plan there are a lot of options available and terms and cost will vary, which means you need to do your homework and review the terms and costs of the plans before investing.
Coverdell Education Savings Account (ESA): An ESA is a tax-advantaged savings vehicle that lets you save money for the qualified education expenses of a named beneficiary, such as a child or grandchild. Qualified education expenses include college expenses and certain elementary and secondary school expenses. The current annual contribution limit is $2,000, and the ability to contribute can be limited by your income. Withdrawals that are used to pay the beneficiary’s qualified education expenses are free from income tax at the federal level, but on the state level it depends on the state you live in. ESA’s are established at a financial institution and usually the parent acts as the custodian and determines the investment allocation inside the account, including stocks, bonds, mutual funds, ETFs.
When the student is a dependent and not an owner of the ESA, money in the plan is not considered the child’s money when applying for federal financial aid. The child’s potential financial aid is increased compared to when the student is not a dependent and the account owner. When withdraws are taken that are not qualified education expenses there is a 10% penalty and taxes owed on the earnings portion of the withdraw. At age 30 (unless the beneficiary has special needs) any funds remaining in the ESA must be distributed within 30 days, the earnings may be subject to tax and penalty and the beneficiary will now control the assets.
UTMA (Uniform Transfer to Minors ACT) and UGMA (Uniform Gift to Minors Act):
These plans allow a minor to receive gifts ranging from cash, investments, real estate, art, without a trustee and are usually established at a financial institution. A parent or grandparent is typically appointed as the custodian to manage the minor’s account until they reach the majority age. These Acts provide tax benefits and control but there is a downside; when applying for financial aid the assets in these accounts will be considered assets of the minor for the calculations. At majority age the assets become those of the minor and they are free to do with them as they want.
As with any investing, understanding your goals, objectives and risk tolerance is critical to determining your financial game plan. If you have questions or are uncomfortable making these types of decisions, you should speak to your financial advisor. Remember, it is easier to save $200 a month than write a $24,000 check in 10 years.
