Do you know how much college will cost in 18 years? The answer may be hard to fathom. For those of us who have attended college, we probably have a hard time remembering exactly how much it cost. In 2012, the average four year degree cost $127,100 at a private college and $37,800, as an in-state resident, at a public university. College tuition continues to increase approximately 5% a year above the consumer price index (the most commonly accepted measure of inflation). If this trend continues in the next eighteen years, the average private college will cost $362,800 and the average public university, for in-state residents, will cost $108,100 for a four year degree.* Do you have a plan in place to pay for this burdensome expense?
How to Save for College
Many parents often ask about the best way to save for their child’s college tuition. Unfortunately, there are no simple answers. If you have made the decision to help pay for your child’s college expenses, there are many things you need to consider. Some of the most important aspects of college funding include: who has control of the funds, how flexible is the plan, how it impacts financial aid programs, what kind of investment options are available, how does it impact your taxes, and what the contribution limits are. Here is a brief overview of some of the most common vehicles for college tuition savings.
Qualified Tuition Plans or 529 plans allow you to pay for college in one of two ways. First, there are the prepaid tuition plans, which only eleven states and one group of private colleges offer. Louisiana does not have a prepay plan. These plans allow the account owner, i.e. parents, guardians, grandparents, to prepay college at today’s rate and the plan promises to pay the future tuition. Funds can only be used for qualified expenses such as tuition, fees, room and board, equipment, books, and supplies. There are no tax consequences for qualified expenses. The assets are considered the account owner’s thus minimizing the impact of federal financial aid qualifications for the student. If your child does not go to college and you have other children, the beneficiary may be transferred to another family member. The maximum contributions vary by state. Secondly, there are state administered college savings plans. The account owner maintains control of the assets in the account and the child is the beneficiary. It works much like an investment portfolio. Each plan has different investment strategies and they vary by state. Most plans offer a limited variety of investment options. Some states, like Louisiana, offer additional matching contributions, which vary by income. Again, the assets belong to the account owner, which minimizes the impact on financial aid qualifications. The beneficiary may be transferred to another family member. The maximum contributions vary by state; however, they are usually between $200,000 and $300,000. As of 2013, Louisiana’s current maximum contribution is $289,900.
Coverdell Education Savings Accounts are similar to the 529 saving plans. These accounts are administered through financial institutions such as banks or investment advisory firms. This allows for a larger menu of investment options, more so than the 529 plan. Contributions are limited to $2,000 per year, per beneficiary. The income restrictions for the contributors are $220,000 for joint filers and $110,000 for single filers. Again, the assets belong to the account owner, which minimizes the impact on financial aid qualifications. The beneficiary can be transferred to another family member. An additional advantage of the Coverdell is assets may be used for primary, secondary, and college expenses.
UGMA(Uniform Give to a Minor Act)/UTMA(Uniform Transfers to a Minor Act) are accounts established by a parent, grandparent, relative, or family friend through a financial service firms. This gives great flexibility in investment options. The accounts are under the control of a custodian until the minor is 18, or 21 in some states. It is simply a money transfer or a gift from a donor to a minor. As of 2013, the maximum tax-free gift is $14,000 per individual, per year. These assets are considered the minor’s; therefore, they are subjected to the “kiddie tax.” Additionally, it will greatly affect the federal aid considerations for the student. The most important consideration is once the child reaches 18 the funds are no longer under the control of the custodian. There are no familial transfer options under the UTMA/UGMA.
These are just a few options available when planning for your child’s college career. Each plan has advantages and disadvantages which is why thoroughly researching your options or working with a financial professional is important. There are additional complexities in each plan not covered in this summary post; this is only a general overview of the most common options available today. One important item to note is as with any investment, the earlier you start saving, the less you will need to contribute. Additionally, the following websites may be very useful in planning for college expenses:
*This information was cited from Savingforcollege.com’s “Family Guide to College Saving 2013”, Joseph F. Hurley, CPA.
Brad Borden, Financial Advisor, Compass Capital Management
Registered Representative and Investment Advisor Representative of Securian Financial Services, Inc.
Financial Advisors do not provide specific tax or legal advice. This information should not be considered as specific tax or legal advice. You should consult your tax or legal advisor regarding your own specific tax or legal situation.
A 529 college savings plan is a tax-advantaged investment program designed to help pay for qualified higher education costs. Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover higher education expenses. Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals.
Your state of residence may offer state tax advantages to residents who participate in the in-state plan, subject to meeting certain conditions or requirements. You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other advisor to learn more about how state based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state’s 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan.
Investments will fluctuate and when redeemed may be worth more or less than when originally invested.
Tracking #737808 DOFU 10/2013
Brad Borden has a Bachelor of Science in Medical Technology from Louisiana Tech University. He obtained an MBA with concentrations in Investment Management and Finance from the Kellstadt School of Business at De Paul University in Chicago. Prior to beginning his career with Compass Capital Management, Brad worked as a Medical Technologist for 14 years. Nine years were spent at Children’s Hospital of New Orleans, Louisiana and the last five years at Northwestern Memorial Hospital of Chicago, Illinois.
Brad became a Financial Advisor after pursuing his personal passion of learning more about the financial markets. He discovered that he wanted the opportunity to assist others in preparing for their financial future. As a former healthcare professional, he is uniquely qualified to meet the specialized goals of healthcare professionals. His goal is to educate and create solid financial strategies for individuals, families, medical professionals and small business owners.