College Planning Topics
College Planning 101
Every year, thousands of students graduate from colleges across the US. A college education comes with many benefits including but not limited to: increased earnings, expanded outlooks on the world, and a competitive edge in the job market. The costs for higher education go up from year to year, but how do families pay for the expenses?
Financing a college education can come in many forms including student loans, financial aid, out of pocket, and gifts from family members. Any successful financial plan starts with saving for college, and this page will explore the different options for saving.
The Cost of College
A college education can be one of the largest expense that you have in your life. On average, the costs for the 2016/2017 school year for a four-year public college (in-state tuition) was almost $25,000 a year. The costs for a four-year private college is even higher at almost $50,000 per year according to the College Board. On average, costs can increase on average 3-6% each year so that you can estimate future costs. These numbers can be daunting, especially if you’ve started saving later rather than earlier.
The earlier you can start saving the better off you will be when it comes time to pay for college. A sound financial plan does not have cost you a fortune; most people save with amounts that they can afford. A monthly amount as little as $100 invested regularly can grow into a sizable college fund for your children. When you get unexpected money like bonuses and tax refunds, you can add those to your college fund as well. Mutual funds and scholarships are also available but take extra effort to obtain.
Luckily there are several different options available for saving for college. Some of the options have tax benefits or other cost saving benefits. Here are some of the options available for saving.
529 Plans are tax-qualified savings plans offered by the states, state agencies, or educational institutions and come in two types of programs. Prepaid tuition plans allow you to purchase credits towards future tuition as well as room and board at participating colleges and universities. Another benefit of prepaid tuition plans is that many states have a minimum guarantee on the investments in those programs.
A college savings plan allows the account holder to set up an account for the student (referred to as a beneficiary) to help pay for eligible college expenses. The account holder has the opportunity to direct where the contributions get invested, usually a set of investment portfolios that the state has approved. Most investment options include a mix of stock mutual funds, bond mutual funds, and money market mutual funds while some plans have age-based portfolios that become more conservative the closer it gets to the child’s college age. Income levels don’t restrict 529 Plans, and contribution limits are typically high, usually around $300,000 or more depending on the state for lifetime contributions.
Coverdell education savings accounts (ESA) is another tax-advantaged savings plan for education that pays for K-12 or college expenses. Where the 529 Plan had much higher contribution limits, the Coverdell ESA is limited to $2000 per year in contributions, and there are income restrictions on who can qualify. Similar to the 529 Plan, you have control of where to invest the contributions and work well with other saving options.
Series EE and Series I savings bonds earn interest that is federal income tax-free as long as the bond proceeds go towards qualified college expenses. The tax-exempt interest is dependent on income limits but can be a good option for those that want a guaranteed rate of return.
UTMA and UGMA accounts (depending on the state) are non-tax qualified accounts used for educational purposes. Each year, the earnings and capital gains get taxed on the child, and there are special kiddie tax rules that provide additional benefits. For full-time students under the age of 24, the first $1050 earned income is tax-free and any additional amounts up to $2100 would be taxed at your child’s tax rate which is lower than their parent’s.
A Roth IRA is typically intended for retirement purposes, but in recent years, people have been using them to help cover college expenses for their children. Tax contributions to a Roth IRA can typically be withdrawn tax and penalty free. Once the account has been in place for five years, and the account owner is age 59 ½ or older, the earnings qualify to be withdrawn tax and penalty free. Earnings suffer a 10% penalty for premature distribution if the owner is under 59 ½ unless the money is used to pay for their child’s college expenses.
Saving for college is a large part of paying for college. Most families will rely on one type of student aid or another to help cover additional costs. These can come in the form of student loans, grants, scholarships, and other forms of assistance. Parents and students can figure out if they qualify for student aid by filling out the Free Application for Federal Student Aid (FAFSA). The FAFSA website is used by universities and the federal government to determine what level of student aid available to you. Individual schools often have financial aid calculators available that can help you calculate the actual costs of attendance. While most factors that determine your student aid eligibility will look at your family’s income, there will be other factors considered. Depending on the school, there can also be student aid that is merit based depending on the department or major that your child has selected. If you need additional help, there are many resources available online. You can also talk with a financial coach who can assist you with making a financial plan for college and provide financial education to help meet your needs.
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