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College Funding

College Funding

College costs continue to increase, although the rate of increase has slowed.   Every fall, the College Board releases updated figures for college expenses.  Here are the numbers for the current school year, 2017-2018:

In state Public College and Universities

Out of State Public College and Universities

Private College and Universities

2 year Public Colleges

Tuition

$9,970

$25,620

$34,740

$3,570

Room and Board

$10,800

$10,800

$12,210

Forecasts call for continuing increases along with a chance of aid for many American families!

So what is a family to do?  Forecast the anticipated costs, determine the family’s financial commitment, and identify appropriate savings programs. http://www.finaid.org/ has a long list of FAQs (frequently asked questions) about the financial aid process and other practical information about this financial issue.

Costs – Check out the websites of potential colleges to determine today’s costs; or simply use the averages above.  With this information, access one of the many excellent calculators on the web to assist with this part of the process. http://kiplinger.com   and http://money.com are two sites you may want to check out.

Family financial commitment – Knowing the anticipated costs, how much will the family contribute to the education of the children? How much will the children contribute to their own education? There is no right answer; families come to different conclusions on this point.

Savings programs – there are many opportunities; two of the more popular programs are the 529 Plans and Education Savings Accounts (ESAs).

529 Plans are funded with after tax dollars and grow tax free provided the distributions are used for qualified education expenses.  Contributors do not need to meet an income test.  Contributions can be very large, even in excess of $10,000 and are considered gifts, so be aware of the gift tax rules if contributing large amounts to these accounts.  Investments within the 529 plans are typically mutual funds.  Many of these mutual funds are implemented as time driven asset allocation models, meaning that as time passes, the managers will reduce aggressive stock positions to more conservative investments.  http://www.savingforcollege.com/ is an excellent site to review available 529 plans.  These plans are administered at the state level, but are very flexible.  For example, California residents can pick the Iowa plan and their students can attend school in Florida.  The states determine the maximum age of the beneficiary and in many cases these can be set up for people into their 30s and 40s.  The states will also mandate an age at which the funds must be used.  Earnings are subject to income taxes and penalties if not used for qualified post secondary education expenses.   Taxes and penalties can be avoided by a rollover to another family member.  There is a very generous definition of family member; including the children of the original beneficiary!

ESAs (Education Savings Accounts) are funded with after tax dollars and grow tax free provided the distributions are used for qualified education expenses.  Contributors do need to meet an income test; although it is a very friendly income test.  Contributions are limited to $2,000 per beneficiary per year.  Investments within the ESA are selected and managed by the person setting up the account.  These accounts can be set up directly wherever you prefer to invest: your bank, credit union, brokerage firm or directly with other investment houses such as mutual fund companies.  Beneficiaries must be under the age of 18 and the money must be used by age 30 or be subject to taxes and penalties on the earnings.  Taxes and penalties can be avoided by a rollover to another family member.  There is a very generous definition of family member; including the children of the original beneficiary!

One last point, do not sacrifice your retirement for the sake of your children’s education.  Keep in mind that there are three ways to pay for college:

1-Before our children go, by using the programs noted here or others that you may prefer.

2-During our children’s education, as most likely the parents will still be employed.

3-After the education is complete, by paying back loans.

In contrast, for most of us, there is only one way to pay for retirement:

1-We better save before we get there!

It can seem daunting and there is much more to the financial aid process then I can address in this blog.  With proper planning, you can ease this financial stress.   Please feel free to call or email if you have any questions or comments regarding this or any other financial topic.