Start Early On College Saving
College costs can be more than a little painful, but with the proper financial planning, you could be whistling your child’s college fight song all the way to the bank.
Although federal and state financial aid for college students have decreased, published in-state tuition costs and fees at public four-year institutions increased 3.5 percent per year beyond inflation over the last 10 years, according to the College Board, a nonprofit representing colleges and universities. Based on its Trends in College Pricing 2016 report, the average published tuition and fee price in the public four-year sector is 3.7 times its level 40 years ago (after adjusting for inflation). The average price of attending a private university for four years (including transportation and other living expenses) has reached more than $197,280 based on 2016-2017 rates.
With Americans marrying later in life and waiting to have children, parents may be facing college costs while simultaneously planning for retirement. That makes starting college savings early even more important to your future as well as your child’s – especially considering median family income for those with bachelor’s degrees or higher was $111,270 in 2015, more than twice the median income for families headed by a high school graduate, according to the College Board report.
Regardless of your child’s age or the number of children you have, you do have options for investing for college costs. Your financial planner can help you evaluate different strategies and select those that best meet your goals for paying for college.
Scholarships, Grants and Aid
Financial aid can include loans, scholarships, grants and work study programs. Even if your student isn’t in the top level of his or her class, opportunities may be available for financial aid. A student can be awarded grants or scholarships based on financial need, academic standing, extra-curricular activities and civic involvement. Make sure to fill out financial aid papers to qualify, even if you believe your income is too high to receive aid.
These plans, available in most states, allow you to make contributions to an investment account in the name of the child and then make tax-free withdrawals for educational expenses. Plans and investment options vary widely, so you may want to consult your financial planner for more information. States may also have potential state income tax or other benefits to offer that should be considered.
If a 529 doesn’t sound appealing, you can make penalty-free withdrawals from an existing IRA account for any educational costs. However, there are contribution and withdrawal limits, and not everyone can qualify for an IRA. Withdrawals also reduce the assets growing tax-deferred in the IRA and could seriously impact your retirement goals.
If grandparents wish to contribute to an account, you may want to consider a Coverdell Savings Account. These types of accounts allow anyone with a modified adjusted gross income of less than $110,000 a year (single) or $220,000 joint (married, filing jointly), to make yearly contributions of up to $2,000 in an account that has a variety of investment options. Once the student turns 18, they have until their 30th birthday to withdraw the money for educational use.
Creating “Tax Scholarships”
A tax scholarship is a financial technique that creates money by shifting assets to your child over several years and taking advantage of the child’s lower tax bracket. These tax savings can add up quickly and could mean thousands of dollars in extra money that can be used for higher education expenses. Ask your financial and tax professionals for more information on how to take advantage of shifting assets to children.
The variety of options and plans available for college planning can be overwhelming. Your financial professional can help you explore every avenue for sending your child to college without the burden of large loans or the loss of your retirement funds.
Mark Slattery Matt Peters
Securities offered through Securities America, Inc. member FINRA/SIPC, Mark Slattery and Matt Peters, Registered Representatives, Advisory services offered through Securities America Advisors, Inc. CaseSlattery and Securities America are separate companies.
Written by Securities America for distribution by Mark Slattery and Matt Peters