While we may not be mentally prepared to think about it, back-to-school planning is right around the corner! Let’s spend time reviewing some college planning fundamentals and clear up a few of the misconceptions about preparing for the cost of college.
Is a college education still a good value?
The average annual increase in college tuition has been approximately 6.1%.1 College costs are continuing to increase due to colleges spending more to attract the best students, and hiring more faculty to reduce student-to-faculty ratios. With that being said, by 2020, 65% of U.S. jobs will require a college degree, and a shortage of 5 million college-educated workers is projected by 2020.2 Based on this data, a college education can still be a wise investment.
What is college going to cost?
The projected cost for four years of college for a newborn today (assuming inflation of 6.1%) could be over $450,000 for a private school and $220,000 for a public school in 2035.3 The key is to start saving as early and as systematically as possible. Getting other family members involved—if they are willing—can help as well.
Understanding the “real cost of college” versus the “sticker price” of college is important. If your child receives grants, scholarships or other forms of financial aid, this can help to reduce the cost. On average, families paid 28% below sticker price at public colleges and 40% less at private colleges.
What are some of the best ways to save or pay for our grandchildren’s college education?
When it comes to saving for college, 529 plans have some unique features that other savings vehicles do not. 529 plans allow for five years of tax-free gifts to be deposited in one year. Grandparents can build a tax-deferred, tax-free (if used to qualified higher education expenses) fund for their grandchildren while reducing their taxable estate via the gift. If the grandparents own the account, any distributions to grandchildren are considered to be income and can reduce aid. This can be overcome by using the 529 funds in the last year or two of college so aid is not affected in the early years, or it can be gifted to an account owned by the parents. In addition, Grandparents can write checks directly to the institution and are not subject to any annual gifting limitations and there is no impact on the student’s financial aid.
If you are in the process of saving for college or have a child or grandchild getting ready to apply/attend, please reach out to your advisor with any planning questions that you may have.
Will saving for college affect my child or grandchild’s eligibility for financial aid?
If you are not planning to save for college education in the hopes that grants or scholarships will cover costs, you are in the 32% of parents who feel that merit-based financial aid will do the job. 4 The reality is only 0.3% of college students receive enough grants and scholarships to cover all costs.5 Your ability to receive federal financial aid is based on your expected family contribution (EFC), and parental and student incomes are the most heavily weighted variables in the formula. Parents’ savings are only included at 5.64%, and grandparents’ savings for college is counted at 0%.6
Keeping that in mind, your student should complete their free application for federal student aid (FAFSA) form to make sure they do receive any financial aid they’re eligible for.
Comparing college savings vehicles
Understanding the different tax benefits and features of college savings vehicles can help you choose the right one for your needs.
529 college savings plan
- Tax-free investing and withdrawals for any qualified higher education expense7
- Account owner control for the life of the account
- No income limits on contributors
- High contribution maximums
- Low impact on financial aid eligibility (if account owned by the parent)
Custodial account (UGMA/UTMA)
- Funds must be used for the child’s benefit, not necessarily for college
- Portion of investment earnings taxed at child’s and parents’ rates
- Child assumes control at age of majority, usually 18 or 21
- High impact on financial aid eligibility
Coverdell Education Savings Account
- Tax-free investing and withdrawals for any level of education8
- Income limits on contributors
- Age limits on beneficiaries
- Maximum contribution of $2,000 annually per beneficiary
- Low impact on financial aid eligibility
Find the financial aid application at fafsa.ed.gov. The following two FAFSA changes took effect in 2016:
The form for each year is available three months earlier than it had been previously, in October instead of January. You can access the FAFSA for the 2018-19 school year on Oct. 1, 2017. This better aligns the financial aid and college application processes and gives students more time to apply for aid.
Families can use their prior-prior year tax information to complete the form instead of the prior year’s tax information. That means using 2016 tax information instead of 2017 tax information to complete the 2018-19 form. This allows families to file the FAFSA before they file their previous year’s taxes.
- BLS, Consumer Price Index, J.P. Morgan Asset Management. Data represents cumulative percentage price change from January 1983–August 2016.
- Georgetown University Center on Education and Workforce, June 2013. Based on current production rate.
- J.P. Morgan Asset Management, using The College Board, 2015 Trends in College Pricing. Future college costs estimated to inflate 5% per year. Average tuition and fees for the public sector reflect four-year, in-state charges.
- Sallie Mae, How America Saves for College, 2016.
- Finaid.org. Based on full-time students at four-year colleges.
- Sallie Mae, How America Pays for College, 2016.
- Source: JP Morgan College Planning Guide: Sallie Mae, How America Saves for College, 2016. Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.