Funding a College Education
November 22, 2017 by Laura Kotenko, CPA, M.S.T.
A bachelor’s degree is a minimum requirement for almost all occupations and many parents assume that their children will pursue a higher education. Like healthcare, college education costs are rising significantly faster than the rate of inflation.
According to The College Board’s Annual Survey of Colleges, the national estimated cost to attend a public four-year institution, in-state, is $9,650 for the 2016-17 academic year. Even worse, tuition and fees to attend a private nonprofit four-year education can reach $33,480. Also remember that tuition is only half of the story and those costs do not include living expenses such as room and board. The costs stated below are from the 2016 Trends in College Pricing by The College Board.
Average Cost for 2016-2017 Attendance at a Four-Year Undergraduate Institution
|Tuition & Fees||Room & Board||Total|
Between 2006-07 and 2016-17, in-state tuition and fees at public four-year universities increased at an average rate of 3.5% per year. That’s almost double the rate of inflation. Even though the increase in average college costs for 2016-2017 was less than the average annual increases over the two previous decades, the trial of financing these costs remains and students are carrying more debt into their working years than any other generation in history. For many parents, paying for a child’s education is more important than purchasing a bigger home, a new car, or planning for retirement. This is because the value of a college education cannot be measured in monetary value.
An important point to consider is that tuition costs differ by state, making college planning even more problematic. Published 2016-17 in-state tuition and fees at public four-year institutions range from $5,060 in Wyoming to $15,650 in New Hampshire. In Michigan, the state average was $13,568 for the 2016-2017 academic year, ranking 6th highest in the United States. As far as out-of-state tuition goes Michigan ranks 2nd highest with an average of $34,850.
There is an expanding list of financing tools available that can help balance the cost of attending college, which gradually rises each year. Multiple approaches can be used to provide enough funding for an entire education but not all tools can be used together. This means, cautious, early planning is crucial to funding a higher education.
Step one would include meeting with your financial advisor and setting goals for your child’s next step in education. Buying a house, investing in a business, and providing your children with tools they need to succeed are all important factors to measure when deciding the funding methodology you will choose. Your child’s age will also determine which methods to use; saving for an education for a child who is 5 years old will need to be less aggressive and different than saving for a 10-year-old, or for a 15-year-old.
Your child’s educational funding should be an important element of your overall financial plan. Obviously, planning for a college education will be different depending on which college they will choose, funding an Ivy league education is more expensive than a public university.
In addition, staying in close contact with your financial advisor is crucial, your financial situation will probably change over 18 years, hopefully for the better, some tools that are available for you to use now may not be available in the future if your income increases.
Multiple tools, listed below may be used 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
A tuition savings program is a tool that Michigan offers. The Michigan Education Trust invests a parental contribution and has special rules and tax treatments for withdrawals. Some states will let relatives buy a portion of the child’s education at the rate of today, called prepaid tuition. Your asset levels and other programs which you participate can limit eligibility.
One of the most common ways to fund an education are income-producing long-term assets. Parents have numerous choices of assets including CD’s, stocks, mutual funds, and savings bonds.
Your timeline and risk tolerance will most likely indicate which types of investments are preferred for your situation. As stated earlier, the risk for an investment when a child will attend college in ten years can be lower than when the child will attend college in three years.
There is a wide variety of loans available and the loan you choose will depend on other financial goals you have set. Debt is the most common form of financing a child’s education. Just be aware of the long-term burden on you or your child. Whether you take out loans or save through various investment instruments, each choice creates a different personal tax situation for you as well.
One example, The Uniform Gifts to Minors Act allows certain assets to be held by a guardian of the minor. Once the minor turns 21 the assets must be given to them by the guardian. Nonetheless the guardian may accrue income until that time, whether the income is distributed or not the minor is required to include all income on his or her tax return. Because the minor should be in a lower tax bracket than the parent, this could cause a rise in the funds available.
The Education IRA is one savings tool in the wide variety of long-term savings tools to help. 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 those filing single, or $190,000 to $220,000 for those filing married the contribution limit will be lowered. The recipient must be under 18 to receive contributions, and must make all drawings by age 30.
A 529 plan is an excellent long-term education savings plan, run by a state or public or private university, intended to help families set aside money for future college costs. Most plans will not let the school you chose affect the state your 529 savings plan is from. For example, you can be a California resident, invest in a Vermont plan and send your student to college in North Carolina. Contributing to a 529 could be advantageous, depending on your state, Colorado offers a state tax deduction, so your contribution will technically lower your state tax liability.
While attending college, the American Opportunity Tax Credit and the Lifetime Learning Credit may diminish the amount of tax you owe if your income levels do not surpass a certain threshold. If your child is taking out student loans, they can take a deduction for the interest during the first five years of loan repayment. Parents and grandparents might be able to gift the funds for the child to pay back these loans and the deductions act as somewhat of a discount.
Scholarships and grants will be your best friend and your child may be fortunate enough to receive them. This will depend on academic or athletic accomplishments as well as your financial situation. Scholarships will affect the method in which you use the money you have collected over time to pay for their college education.
Remember, planning entails a well-organized approach that is in line with your overall goals that includes an ongoing process of valuation and alteration to meet these goals.