College is Expensive. Create a Plan that Maximizes Your Savings.

By Kevin O’Conner, Financial Advisor

It’s back to school time, which may cause some parents to begin thinking ahead to college, even if their children are still in elementary school. There’s a strong case for graduating from college. People with bachelor’s degrees on average earn nearly 80% higher pay than individuals with only a high school diploma, according to JPMorgan’s College Planning Essentials.

With college costs steadily rising, attending a four-year university has become an increasingly expensive proposition. Over the last 10 years, published tuition and fees plus room and board expenses have increased annually at 2.6% above inflation for public four-year institutions and at 2.3% above inflation for private, nonprofit four-year institutions.

It’s projected that college costs will more than double by year 2036.

Source: College Board Trends in Annual Pricing 2018.
Calculations for estimated future college costs assume a 4.5% annualized increase.

Why are college costs rising? There are four main reasons.

  1. Colleges and universities are spending to attract the best students.
  2. Colleges and universities are hiring to lower the student-to-faculty ratios.
  3. Higher education is receiving less financial support from states.
  4. Colleges and universities are attracting more international students willing to pay higher tuition.

How Much Should I Save?

Parents, grandparents, or other family members can take steps today to begin saving for college with the goal of minimizing costs or even completely covering their child’s education.

The chart below shows examples of how much you would need to save each year, depending on the age of your child if you plan to fully fund the child’s college education. The chart is based on a few assumptions:

  • The annual cost of college is $40,000 a year.
  • College costs will increase annually by 4.5%.
  • The vehicle in which you save for college will annualize at 6% each year.

You can also use an online college savings calculator like those found here and here to calculate how much you’ll need to save based on your timeline.

College Savings Options

While many families save for college by opening a savings account, by doing so, they miss out on an opportunity to maximize their funds. There are several savings vehicles for colleges, with one of the most popular being the 529 Plan.

529 Plan

Forty-two percent of parents own an account, according to the JPMorgan College Planning Essentials.

Key facts about the 529 Plan include:

  • It offers tax-free investing and distribution for qualified college expenses. It also allows for up to $10,000 in distributions per child per year for K-12 expenses.
  • You can change beneficiaries of the plan. If one of your children decides not to attend college, a sibling can become the beneficiary.
  • Investment allocation can be changed up to twice per year for previously invested funds.
  • With limited exceptions, non-qualified withdrawals are taxed as ordinary income plus a 10% penalty on the earnings.
  • There are no income limits for contributors. Special provisions allow for up to five years of annual gift exclusions to be made ($75,000 as individual, $150,000 as a couple).

Currently, 49 states offer a 529 Plan, and 34 states offer resident tax benefits. Seven states offer taxpayers a deduction for contributions to any state’s 529 Plan: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania.

These seven states have a state income tax, but do not offer a state income tax deduction for contributions to the state’s plan: California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina.

Potential Changes to 529 Plans

The Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act, aims to improve the retirement system in the U.S to make it easier for people to save. The bill originally allowed for 529 Plans to pay for other school-related expenses, such as student loans, homeschooling and apprenticeships, among other things.

It passed the House in May and is currently awaiting a hearing in the Senate. According to several news sources, part of the holdup in the Senate is due to the removal of the 529 Plan language by House Democrats.

We’re keeping an eye on this legislation and its potential impact on our clients. We will keep you informed of any changes.

Custodial Account UGMA/UTMA

Another common savings vehicle for college is a Custodial Account UGMA or UTMA. Under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minor Act (UTMA), you can create a custodial account on behalf of your child or grandchild.

  • You or another custodian manage the funds deposited into the account until the child is considered an adult, which varies from age 18-25, depending on state law.
  • Funds must be used for the child’s benefit, but there is no requirement stating that they are to be used for college.
  • Income is taxed at trust rates under the 2017 Tax Cuts & Jobs Act.
  • There is a high impact to financial aid eligibility.

A Custodial Account UGMA/UTMA may be an option if your child doesn’t plan to attend a traditional four-year college or you will not rely on financial aid to pay for educational expenses.

College Savings Guidance

We know that saving for college is important to many of our clients. We can help you understand the tax benefits and implications of specific savings plans and work with you to find the right savings vehicle for your family.

If you’d like to discuss your current college savings plan or need to create one, call us at 770-368-9919, or contact Cliff at [email protected] or Kevin at [email protected]. You can also download our 2019 Annual Planning Guide for additional tips on saving for retirement, tax planning, estate planning, and more.