Monday marked the official arrival of Autumn, which means sweater weather, football, fall foliage and of course, back to school. While most youngsters have already headed back to to the classroom, it's a good time to highlight the importance of planning for college.
What Does College Cost?
The first step in planning for higher education costs is understanding what they are. Costs are high today and will be even higher when your children or grandchildren attend, thanks to annual tuition inflation that is outpacing the overall cost of living. According to research from JP Morgan, college tuition has gone up 6.4% each year since 1983, a pace that doubles about every 11 years. Tuition has risen twice as quickly as medical costs and nearly five times more than home prices.
Unsurprisingly, student debt is also on the rise. According to a new report from the Institute for College Access and Success, last year's graduates with a bachelor's degree averaged about $29,200 in student loan debt, a new record. And, the nation currently has around $1.6
rillion in student loan debt outstanding.
For 2018-19, the average 4-year cost at an in-state, public university (including tuition, fees, room and board) was $21,370. A private university averaged $48,510. But for a child born today, their projected costs are $221,667 for a public university and a whopping $503,186 for a private school education.
These numbers are scary (especially if parents are funding college for multiple children), but with the right financial plan in place, paying for your child or grandchild's education is within reach.
We've spoken before about the benefits of 529 plans, but it is worth reiterating. Gifts to 529 plans can help families meet college costs while also reducing estate taxes, increasing inheritances and creating lasting legacies.
- 529 plans allow for five years of tax-free gifts in one year — up to $75,000 per child from individuals and $150,000 from couples.
- One large gift at a child's birth can help pay nearly all expected four-year public and private college costs.
- All 529 plan gifts and investment gains are removed from the contributor’s taxable estate — without losing control over the assets.
- 529 plans have no age limits, which means the same account can be used to send multiple students or multiple generations to college.
- Side note: although we are focusing here on college costs, funds held within 529 plans can also be used toward k-12 education fees.
Here is an example of how the flexibility and tax benefits of a 529 plan make an excellent vehicle for legacy and estate planning. In the illustration below, a one-time gift of $150,000 at birth is enough to fully fund a child's four year education AND it provides $1.29 million to a grandchild 48 years later. Money leftover after college, continues to grow in the child's name. Once a grandchild is born, the account beneficiary is changed. If the grandchild doesn't spend it all, the account could be transferred to a third generation.
These figures are based on a number of assumptions including the timing of a grandchild's birth (something you would have no control over!) and an annual investment return of 6% on the funds. Of course even a small increase in returns can have a big impact on the total funds available for college, so getting the asset allocation and risk/reward ratio right is necessary. And, everyone's individual situations are different, so consulting with a tax adviser is also needed.
But the key takeaway is that even though college costs are sky high, there are ways to meet the need. The bull market in equities continues to roll on, so if you find yourself in a position to help your family members, give us a call. We can work with you on your year-end tax planning and set you up with the right college planning strategy for your family.