Today, a college degree is a minimum requirement for most high-skilled occupations and many parents assume that their children will continue their education after high school. Still, the average cost of a four-year college education continues to rise more quickly than the rate of inflation.
According to The College Boards Annual Survey of Colleges, the estimated cost to attend a public four-year institution, in-state, is $9,650 for the 2016-17 academic year. Tuition and fees to attend a private nonprofit four-year education can reach $33,480. Keep in mind, these costs are estimates and do not include living expenses such as room and board.
Average Cost for 2016-2017 Attendance at a Four-Year Undergraduate Institution
Between 2006-07 and 2016-17, published in-state tuition and fees at public four-year institutions increased at an average rate of 3.5 percent per year beyond inflation. Although the average increase in college costs for 2016-2017 was less than the average annual increases over the two prior decades, the challenge of financing these costs remains. Because the value of a college education cannot be measured in dollars and cents, for many parents, financing a child’s education is as important a financial responsibility as purchasing a home or planning for retirement.
It is also important to recognize that tuition costs vary by state, making college planning even more difficult. Published 2016-17 in-state tuition and fees at public four-year institutions range from five thousand dollars in Wyoming to fifteen thousand dollars in New Hampshire.
There is a growing list of funding tools available that can help offset the cost of attending college, which steadily rises each year. While multiple tools can be used to provide sufficient funding for an entire education, not all tools can be used in conjunction. Therefore, careful, early planning is the key to funding higher education.
The first step is to meet with your financial advisor and set goals for your child’s education. The funding methods you will utilize will depend largely on the age of your child when setting these goals and other financing arrangements you plan to maintain concurrently, which could include paying a home mortgage, investing in a business and saving for retirement.
Your child’s educational funding should be an integral component of your overall financial plan.
When setting these goals, you will need to determine how much money you intend to contribute to a college education. Financing an Ivy League degree will require a different approach than funding a public college education. In addition, your financial situation will change over time; and some tools that are available to you when you begin planning may not remain available if your income increases over time.
Ways to Fund an Education
Many states now sponsor tuition savings programs that invest parental contributions and have special rules and tax treatments for withdrawals. Other states have prepaid tuition programs that allow relatives to purchase a portion of their child’s future education at today’s rates. Your asset levels and other programs in which you participate can limit eligibility.
Now, income-producing assets are probably the most popular way to fund an education in the long-term. However, parents have many choices of assets including mutual funds, stocks, CDs and savings bonds as well as other types of investments.
Your time horizon will most likely dictate which types of investments you choose because risk tolerance for an investment when a child will attend college in ten years is much greater than when the child will attend college in three years.
The most common alternative when financing a child’s education is debt. There are many types of loans available and the type you utilize will depend upon your other financial goals. In addition, you may foresee that your child will take out loans for his or her education, which could affect how you transfer assets to the child.
For example, certain assets can be held for a minor by custodians under the Uniform Gifts to Minors Act. Custodians may accumulate income until the minor reaches age 21, at which time the property must be distributed. The minor includes all income on his or her tax return whether distributed or not. Because the minor should be in a lower tax bracket than the parent, this could increase the funds available.
There are many long-term savings tools to help save, one of them being the Education IRA. Currently, the total contribution for any one beneficiary is limited to $2,000 per year. If your adjusted gross income is between $95,000 -$110,000 for single persons, or $190,000 to $220,000 for married persons, the contribution limit will be reduced. The beneficiary must be under age 18 to receive contributions, and must make all withdrawals by age 30.
Another excellent long-term savings approach is contributing to a 529 plan. A 529 plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. In most plans, your choice of school is not affected by the state your 529 savings plan is from. For instance, you can be a California resident, invest in a Vermont plan and send your student to college in North Carolina. Certain states offer tax advantages for contributing to a 529. For example, Colorado offers a state tax deduction, so your contribution actually lowers your state tax bill.
While your child is attending college, the American Opportunity Tax Credit and the Lifetime Learning Credit may reduce the amount of tax you owe as long as income levels do not exceed a certain threshold. And if a child is taking out his or her own student loans, he or she can take a deduction for the interest during the first five years of paying back the loans. Because every little bit can count at this point, parents and grandparents may be able to gift the funds for the child to pay back these loans and the deductions act as a kind of discount.
When your child is applying to colleges, he or she may be fortunate enough to receive scholarship funds or grants depending on his or her accomplishments and your financial situation. Scholarships will affect the manner in which you use the money you have accumulated over the years to pay for college.
College Education Funding Tools
It is essential that multiple tools are used together to provide sufficient funding for an entire education. Use these tools when funding a college education:
• Taxable Savings
• Uniform Gift to Minors Act
• State-Sponsored Tuition Savings Plans
• Prepaid Tuition Plans
• Education IRAs
• Roth IRAs
• Government Loans
• Pell Grants
• Hope Scholarship Credit
• Lifetime Learning Credit
• Deductions for Student Loan Interest
• Institutional Scholarships
• Other Scholarships
Remember, planning requires a disciplined approach that is consistent with your overall goals and entails an ongoing process of assessment and adjustment to meet these goals. If you have questions about education planning or funding a college education, contact us today.