Katherine Sojo, CFP® Financial Advisor
Did you know that in 2015 it cost $25,400 for a student to attend college? According to the National Center for Education Statistics, this was the average annual cost including tuition, fees and room and board for a four-year university. College tuition is said to inflate approximately 6% per year; this means a college student who paid $25,400 for an academic year in 2015 would pay $45,400 in ten years for his or her first year of college for the same education. Unbelievable! How is a college student expected to come up with this kind of money? Sadly, colleges don’t care. It is up to you, as the parent, to make sure your 18-year-old heading off to college is doing so with a decent portion of his or her expenses covered.
Some people have the mindset of, “I worked hard my entire life and so should my children!” I agree 100%; hard work builds good character and appreciation. However, the amount of student loan debt college students are walking out with is outrageous and barely gives anyone a fighting chance. You are immediately drowning before you even land your first interview out of college. Based on information from the Consumer Financial Protection Bureau, the U.S. is carrying a whopping $1.2 trillion in federally-backed educational debt. Why not give yourself and your child the peace of mind of not adding to this number, or at least not adding substantially, because you have successfully and tactically planned ahead? According to an educational clock developed for Marketwatch, the nation’s outstanding balance of student loans is growing by $2,700 every SECOND. Currently, 70% of college graduates carry student loan debt, and only 37% of borrowers are actually paying down their loans. If your child is part of the 70% of students with debt, you can absolutely believe it will be a burden to carry when attempting to purchase a home or finance a car, since any income they do have will largely be going toward student loan payments. It also hinders their ability to save appropriately toward a retirement plan. As a basic rule of thumb, if you are between the ages of 25 and 35 the savings rate toward retirement as a percentage of your gross income should be 10-13%. This savings rate becomes very difficult to achieve if you have a $300 monthly student loan payment.
The key is to start saving as early as possible toward your child’s education. Make saving for college a top priority. The best place to start is asking “How much can I reasonably save toward my child’s education without risking the success of my financial plan?” We have the planning tools to help our clients answer this question by incorporating the client’s resources, financial goals, and risk tolerance to generate a potential scenario for financial success. The goal is to assist your child through college and minimize the amount of student debt he or she takes on. There are several vehicles used to save for college, such as:
State Prepaid Tuition Plan: This plan is sponsored by the state you live in, and allows the purchase of college credits now for use when your child attends college. The owner does not share in the future risk of increased college tuition, but there is no growth component with this plan. This plan is designed to simply cover tuition expenses only. If the credits are used toward college expenses, there are no income tax consequences. This plan usually limits your child to attend in-state schools only. In the event your child decides to go out of state, or you decide to cancel the plan, you will generally receive what you paid initially minus administrative expenses.
College Savings Plans, commonly known as 529 Savings Plans: These plans allow you tax-deferred college savings for any eligible college in the country, and you can open one of these plans in any state regardless of where you reside in the U.S. If the funds are used for qualified education expenses (tuition, fees, books, room and board), they are tax free. This type of plan can be used to benefit anyone, a niece, nephew, friend, etc. The owner of the plan can change the beneficiary at any time, avoiding gift tax consequences as long as it is rolled over to a family member. Contributions can be made up to $14,000 a year per person to avoid any gift taxes or one can accelerate five years of gifting for a total of $70,000. Different from the State Prepaid Tuition Plan, a 529 plan can be invested in the market and has the potential of growing beyond the actual college costs. If you live in a state with state income tax, we recommend you look into your state’s 529 options since tax credits may be available. If you live in a state with no state income tax, we recommend the use of the Nevada Vanguard aggressive age-based 529 plan. Every couple of years our firm reviews all available plans to search for the one with the best combination of top investment options, lowest fees, and tax savings.
Coverdell Education Savings Account (ESA): This is a regular savings account that is setup to pay the education expenses of the designated beneficiary. This option actually qualifies for higher education, elementary, and/or secondary educational expenses as well. It is the only option out of the three listed that has this unique feature. Any distributions made for qualified education expenses are tax free. This savings vehicle must be established before the age of 18, and the total annual contribution cannot exceed $2,000 per beneficiary. This vehicle limits contributions up to the age of 18. There is also an income phase-out based on the taxpayer’s Modified Adjusted Gross Income (MAGI). For 2016 the MAGI for married couples is $190,000 to $220,000 and for others $95,000 to $110,000. The assets in a Coverdell ESA must be distributed by the time the beneficiary turns 30.
The takeaways are: first, determine how much you can reasonably save toward this goal. Second, make a plan to fund this goal, and last, choose the right savings vehicle for you and your child. You are helping your child leave college debt free or close to it and they can become financially independent sooner — all thanks to your smart planning!
Feel free to contact Katherine Sojo with any questions by phone 305.448.8882 ext. 243 or email: KSojo@ek-ff.com
Evensky & Katz / Foldes Financial 