College Planning
Empty Your Nest, Not Your Savings
Do you dream of your child becoming a doctor? Or the next great lawyer? Of course, a well-paying, rewarding job is all you really want for your kids' future. The key for either scenario is a college education. But can you afford it? Helping to secure your children's future shouldn't come at the risk of your own.
You'll find a way
You know the importance of a college education. You know that without it, your children may be at a great disadvantage later in life. That's why, despite the skyrocketing costs, you also know that telling your kids, "Sorry, we can't afford it," doesn't have to be an option. It helps to understand the many options available to help fund a college education.
Price check
So what will college cost when the kids are ready to leave the nest? Consider that the average annual price of a four-year private college in 2013-2014 is $40,917 (includes tuition, fees, room and board); while the average annual price of a four-year public college, for in-state students, is $18,391.1
Now, multiply that by four years – and by each child. And don't forget to account for tuition increases, which have averaged about 5-8 percent annually, outpacing the inflation rate the last few years. At that rate, in 2024, the total four-year cost will be $357,370 for a private college and $160,627 for a public college!2 (Assuming a 7 percent tuition inflation rate).
To accumulate enough money to foot such a bill, setting aside money sooner rather than later is a good idea, even right after a child is born. As the following chart shows, to net even $50,000 towards college costs, you would have to save $100 a month beginning at birth. And the longer you wait, the more you'll have to put away each month to reach that same $50,000.
| If saving begins when the child is: |
Born |
Age 4 |
Age 8 |
Age 12 |
Age 16 |
| Amount you need to save monthly to have $50,000 at age 18* |
$103 |
$161 |
$271 |
$540 |
$1915 |
* Assumes 6 percent compound annual interest. Hypothetical example and not intended to represent the performance any specific product.
1The College Board, Annual Survey of Colleges; Trends in College Pricing 2013.
2FinAid, College Cost Projector, www.finaid.org/calculators/costprojector.phtml
Remember, all investments carry a degree of risk and past performance is not a guarantee of future results.
Save and study plans
The government has established a number of programs and tax laws to help make saving for college easier. A few popular options include:
529 Plans – These state-sponsored investment plans provide tax-deferred earnings and income tax-free withdrawals (for qualified expenses). In addition to tuition, room and board, the money can be used for other expenses, such as books and supplies. Some state plans even allow you to deduct contributions from state income taxes. If the account's beneficiary (the child) decides not to attend college, the money can be put towards another family member's education; otherwise, it's taxed at your normal rate. Remember, withdrawals for non-qualified educational expenses are subject to a 10% federal tax penalty and are taxed as ordinary income.
Before investing in a Section 529 plan, you should consider whether the state you or your designated beneficiary reside in or have taxable income in has a Section 529 plan that offers favorable state income tax or other benefits that are only available if you invest in that state's Section 529 plan.
Coverdell Education Savings Account – This account provides tax-deferred earnings and income tax-free withdrawals (for qualified expenses), but participants must meet specific income requirements and you can only contribute up to $2,000 annually. If your income exceeds the maximum, however, grandparents and other relatives can set up a Coverdell in your child's name. The fund is transferable to another child if a first child does not go to college; however, taxes and penalties apply if it's not used for college.
Uniform Gifts (or Transfers) to Minors Act – UGMAs/UTMAs allow you to transfer up to $11,000 a year to an account held in a child's name; although you (or the donor) are the custodian of the account. The money is taxed at the child's rate and is no longer part of the adult's taxable holding; so, technically, it can reduce your income tax bill. Realistically, though, the gift must be sizeable for any real tax benefit. Also, once given, it can't be taken back; and the child can use the money for anything – not necessarily college – once he or she reaches adulthood.
Tax Credits – Families that qualify can earn income tax deductions (tax credits) for college costs. The American Opportunity Tax Credit allows taxpayers to claim a maximum credit of up to $2,500 for tuition and fee expenses per year. The Lifetime Learning Credit allows taxpayers to claim a maximum credit per family of $2,000, which equals 20 percent of up to $10,000 of expenses incurred during the taxable year for qualified tuition and fees for eligible students for post-secondary education. Family income limits apply.
Going to the source
Most schools offer some type of financial support for students who qualify, such as:
- Financial aid – Factors considered include parents' annual income, assets, number of dependents, other family members in college and unusual circumstances.
- Loans – Students must repay the loan through a payment schedule for many years after graduation (which could become a financial burden and affect credit rating).
- Athletic and academic scholarships – Awarded to students based on a variety of achievements and qualifications.
Other sources of aid from schools include work-study programs, merit awards for academic achievement, activities awards for involvement in various student activities and assistance for disabled students. Contact each school for its specific programs and policies.
Other options to consider
It's wise to carefully consider the advantages and disadvantages of all the options available to you. Some other options are:
- Retirement plans – Some tax-deferred savings plans, like IRAs, allow you to access money for educational expenses without penalty; however income limits and withdrawal restrictions often apply, and you'll have to pay income tax on the money. In addition, this lowers the savings you've built up for retirement, and you might have to work longer to rebuild your nest egg.
- Home equity loan – While rates on home equity loans are low and interest is tax deductible, using a home equity loan to fund education could extend the length of your mortgage, perhaps into retirement years.
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