Fall is a time for new beginnings. It's almost the season to enjoy the crisp, cool air, football games, and pumpkin spice everything.
It's also time for the kids to wrap up their summer reading and head back to school. It can be a fun yet stressful time for many parents as it means they are one year closer to paying college tuition. Planning for these expenses as early as possible can help to ease the tension.
College education costs are inflating at roughly 5% per year. If tuition keeps growing at this rate, babies born in 2019 could see four-year degrees costing approximately $280,000 for public school and $572,000 for private school.
The following story demonstrates how the costs of education vs. income have changed over time.
Two bright, promising teens from typical families set off on the journey toward adulthood by graduating high school and moving on to college to pursue their dreams of entering the exciting and dangerous field of accounting. Max Martyn heads off to a public university in 1976, paying just $1,171 for total tuition, room, and board. (View statistics on college tuition costs by year from National Center for Education Statistics HERE). With the median income in the United States hovering at $12,690, Max's tuition is approximately 9% of his parent's annual income. (Information on Median Household Income taken from United States Census Bureau, view it HERE). Minimum wage is relatively static at $2.30/hr, and Max will need to work about 10 hours per week at a minimum wage job to pay for his tuition, room, and board each year. (Minimum Wage information taken from U.S. Department of Labor, view their tables HERE).
Fast forward 30 years, Max's son, Cody Martyn, is leaving the nest for a state university. He'll pay, on average, $14,203 for tuition, room, and board. Cody's parent's income (the median income for 2006) is $58,746, making Cody's tuition a whopping 24% of that yearly salary. Max and his wife simply can't afford to allocate nearly a quarter of their annual income to Cody's education. In order to pay for school, Cody will need to work 55 hours each week at minimum wage ($5.15/hr).
The moral of the story? College costs are inflating faster than wages, and it is essential to create a plan and start saving as early as possible.
There are multiple options when it comes to financing education, such as payment plans, student loans, and 529 plans. A popular choice is the 529 plan due to their flexibility and tax advantages. 529s allow individuals (parents, grandparents, friends, etc.) to invest dollars in a specific account earmarked for education. The investments grow tax-deferred over time and, if used for qualified educational expenses, come out tax-free. Tax-free distributions mean more dollars available for college expenses. Qualified educational expenses include tuition, fees, books, supplies, equipment, and room & board. There are no income limits to contribute, and many plans have a maximum investment of $250,000 or higher.
529s are very flexible. Changes can be made to the account by the owner. If the child has leftover funds in the account or chooses not to attend college, the beneficiary can be changed to another member of the family. If the child receives a scholarship, they can withdraw that amount from the account without incurring the 10% penalty. However, taxes will be owed on any gains on the contributed amount withdrawn.
The Tax Cuts and Jobs Act of 2017 now allows tax-free 529 withdrawals up to $10,000 on K-12 educational expenses. Public, private, and educational schools are included. Many Trade Schools may also be considered as a 529-funded, post-secondary, education option.
These accounts are relatively easy to open online. The following information is typically needed:
- The Child's Social Security Number
- The Child's Birthdate
- The owner's information (address, social security number, birthday, etc.)
- The successor owner's information
- Bank Information (optional)
Many plans offer age-based and target-date investment options, which automatically change the allocation over time, getting more conservative as the child gets closer to college. If the account is not invested in a target-date fund, we recommend reviewing the allocation on an annual basis to make sure it is in line with the overall strategy.
We strongly encourage speaking with your advisor to determine which college savings plan is best to accomplish your goals. College projections can be completed to determine lump sum versus monthly funding for both public and private schools.
For more information on this topic, please contact Sara Gans.