|
Once, a high school diploma and a capacity for hard work were all that was
required for someone’s success in the world. But today a college degree has
become the minimum requirement for even entry level jobs in many fields.
Without a college education, your son or daughter, grandson or
granddaughter, may face limited employment opportunities, reduced options
for advancement, lower pay, and less job security.
According to the U.S. Census Bureau, those workers with a bachelor's degree
earn an average of more than 60 percent over those without a four-year
degree. Over the course of a lifetime, the value of a college degree can
exceed $1 million in increased earning power. That's why so many parents and
grandparents work hard to give the children in their life a good start with
a college education.
But that education doesn't come cheap. College costs have risen at twice the
annual rate of inflation since 1985. A degree from a four-year private
college can cost almost $80,000, while an Ivy League education will set you
back over $100,000.
The good news, however, is that 70 percent of today's college students at
four-year institutions spend less than $8,000 per year for tuition and fees.
But that's still a tuition bill of roughly $32,000 for a four-year degree!
As with any savings goal, the sooner you get started on saving toward a
loved one’s college education, the easier the task will be and the less
you’ll have to put away each year. Today, the average cost of a four-year
education today is less than $32,000. But remember that tuition increases
are outpacing inflation by two to one. If your youngster won’t be entering
college for another 16 years, today's $32,000 four-year college bill will
cost you over $81,000 in 16 years -- assuming an annual tuition inflation
rate of 6 percent per year.
Before a child or grandchild can hit the
books, you may have to hit up the bank for financial aid.
If
you are planning to pay that sum out of your own pocket, you'd need to put
away about $3,500 in a tax-deferred account earning 5 percent every year for
the next 16 years. What if you put off saving until she's ten years old?
Then, you'll need to set aside $6,500 a year! Clearly, the sooner you start
saving for a child’s education, the easier it is to accumulate enough money
for college.
Keep in mind that college tuition is just part of the expense of a higher
education. Books and supplies can add several hundred dollars a year to the
total cost. And if your student will be living on campus, housing can add
another $10,000 a year -- or more -- to your total bill. Of course, you
don’t have to pay for a college degree out of your own savings. There are a
host of options available to help a parent or grandparent send a child to
college.
FINANCIAL AID
State and federal financial aid may be available to help some families. But
first, you'll have to contribute your "Expected Family Contribution," or EFC.
This is the amount that the government or federal student aid program says
you should be able to afford using your current income, tapping into your
savings or borrowing the money. For many middle-class and affluent families,
the EFC can easily be equal to the entire cost of the child's education. But
for those of more modest means, financial aid can make a difference. The
most common financial aid for undergraduate students is the Pell Grant,
limited to $3,000 per school year and reserved for the neediest students.
STUDENT LOANS
For
decades, student loans have been one of the most popular methods of funding
undergraduate or graduate degree programs. In the case of a Plus Loan, the
parents may take out a loan for the college-bound student. Other loan
programs loan the money directly to the student.
Each year, the federal government provides about $40 billion in student
financial aid through one of two lending programs: the Federal Family
Education Loan Program (FFELP) and the Ford Direct Lending Program (FDLP).
FFELP distributes loan money to students through a network of commercial
lenders, while the federal government itself lends money directly to
students through the FDLP. In either case, the loans are backed by the
federal government.
FFELP loans included so-called Stafford loans, made directly to students, or
PLUS loans, in which the parents are the borrowers. The interest rate for
Stafford loans can't exceed 8.25 percent, and the amount you can borrow is
limited - just $2,625 for the first year, for example. Repayment must begin
six months after the student completes school. There's no limit to how much
a parent can borrow with a PLUS loan, but repayment begins immediately.
529 PLANS
Another popular solution is the state-sponsored college savings plans
established by Section 529 of the Internal Revenue Code. Depending on the
plan, benefits may include state income tax deductions for plan
contributions. Account values grow free from federal and state income taxes.
Qualified expenses can be paid for from 529 plan values without a taxable
consequence. Anyone can open an account and anyone can be a beneficiary. You
can even use a 529 plan to finance your own college education. To maintain
the federal tax benefits, you can only use your savings to pay for expenses
such as tuition, fees, room and board, books and supplies required for
attendance. You can open more than one account. Finally, assets in the plan
belong to the plan owner, not the beneficiary. There are two kinds of 529
Plans:
•
Prepaid Independent 529 Plans An independent 529 is a prepaid tuition plan
offered by Colorado, 18 other states and the District of Columbia that lets
you lock in college expenses at today’s rate, even though it may be years
before your child or grandchild enters college. The participating member
college assumes the investment risk if the value of your 529 Plan doesn’t
increase in step with tuition inflation. The amount of your contribution
depends on the plan and the age of the student, and isn’t tax deductible,
but withdrawals are, as long as they’re used for qualifying educational
expenses. The downside: if the child chooses a college that doesn’t
participate in your Plan. In that case, you can take a refund which will be
equal to your original purchase amount, plus any investment earnings. If you
use the money to pay for college expenses at another institution, you won’t
have to pay federal taxes on your earnings. But you will have a tax
liability if you use the money for other purposes.
•
Standard Savings Plans Like the Independent 529 Plan, this plan is offered
by several states, usually with the help of a financial services company.
Depending on the plan, you can invest from $100,000 to $305,000 per child.
Some states allow you to deduct from your state income tax part or all of
your plan contributions. Withdrawals are tax-free through 2010. After 2011,
distributions to the beneficiary will count as income under current tax law.
These days you practically need a degree in
high finance to finance a higher education
COVERDELL ESA
The Coverdell ESA is an investment account available to single taxpayers
earning less than $110,00 or married taxpayers earning less than $220,000
annually. You may contribute up to $2,000 per year per student. Although
your contributions are not tax deductible, withdrawals are tax-free as long
as they are used for qualifying educational expenses.
ROTH IRAS
These retirement vehicles can also be used to pay for education expenses --
or any other purpose for that matter -- with no tax consequences, as long as
you limit your withdrawals to your original contributions. Single filers
earning less than $95,000 a year or joint filers earning less than $150,000
can invest $3000 a year in a Roth IRA. If you are over age 50, you can
invest up to $3,500 annually.
SCHOLARSHIPS
A scholarship is generally awarded to a student from a private funding
source based on financial need or to award a student's special talents in
academics, music, athletics, or some other area. A surprising array of
sources provide scholarships, including your employer, civic organizations,
religious groups, etc. Your student may have to compete for a scholarship,
so make sure you know well in advance the criteria for qualification.
Scholarships do not have to be repaid.
BEQUESTS AND OTHER GIFTS
Of course, there are other ways you can contribute to the college goals of a
loved one. Depending on your financial resources, you can give them the
money outright. Each year, you can give a loved one up to $11,000 gift- and
estate-tax free. If you are married, you and your spouse can give a loved
one a combined gift of $22,000. You can give even more, but you may create
an estate tax liability for yourself in the future, so proceed with caution.
Keep in mind, however, that when you give away your money with “no strings
attached,” you lose control over how the funds will be used. For that
reason, you may want to use one of the common estate planning tools to
direct how the funds can be used. With a trust, for example, you can direct
a Trustee to distribute funds to pay for a beneficiary’s specific
educational purposes. Just keep in mind, however, that any gifts you make to
a loved one could have an impact on their attempts to qualify for financial
aid.
Ensuring that a loved one gets a proper start in life is an important goal
of estate planning. For more information about how we can help you achieve
this important family objective, give us a call today!
|
