How Much Will it Cost to Send Your Kids to College?

I am in favor of college students “having some skin in the game” in sharing in the cost of their education, but many graduates are leaving colleges with crippling student debt today. For parents and grandparents, it’s never too early to start saving for this investment in your child’s future. As part of my education planning for clients, I use specific colleges to estimate how much a future college education may cost and to suggest how much to save monthly. Ready for some sticker shock?

Example 1: Max is 6 years old and his parents hope he will attend their alma mater, Texas A&M. Today, in-state costs (tuition, room/board, books and fees) are $19,702. The projected costs when Max goes to school will be $117,520 for four years. To save this amount, invest $454 a month, starting immediately.

Example 2: Carla is 3 years old and her parents would like for her to be able to attend a private university, such as Southern Methodist University. Today’s annual cost is $61,385. Projected future expense: $400,105. Invest $1,164 a month.

Assumptions

  • Student attends college for 4 years at age 18. Of course, many take more than four years, especially if they change majors or decide to pursue graduate studies.
  • These calculations assume 3% inflation. In recent decades, college costs have increased by 5-6%. Hopefully, these increases will moderate as overall inflation is currently quite low.
  • We are assuming a 6% rate of return on the investments, and tax-free withdrawals from a 529 Plan. Although this is a fairly conservative assumption, it is, of course, not guaranteed.

We can adjust these assumptions, which will change the estimated costs and savings requirements. The calculator gives us a ballpark idea of just how significant an expense it is to send a child to college today, let alone two or three kids. Typically, we run a couple of scenarios to give a range of possible costs for parents.

A 529 College Savings Plan is a great tool for this job. Withdrawals from a 529 are tax-free when used for qualified higher educational expenses. There is no expiration on funds in a 529 and the account owner can change the beneficiary of the account, if one child does not need all the funds. The biggest benefit of a 529 is the tax-free growth, which means that we want to start a 529 as soon as possible for a child to receive many years of compounding. Once they’re 16 or 17, it’s too late to receive much of a tax benefit.

Link: 8 Questions Grandparents Ask About 529 Plans

Want to estimate how much it will cost for your child or grandchild to get the same college education you received, or wish you had received? Send me the details and I’ll get back to you with an estimate. If you’re ready to add college savings to your overall financial plan, I am here to help!

Five Ways To Invest Tax-Free

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“It doesn’t matter how much you make, but how much you keep.” Over time, taxes can be a significant drag on returns, especially for those who are in the higher tax brackets. Today, many families are also hit with the 3.8% Medicare surtax on investment income. If you are in the top tax bracket, you could be paying as much as 43.4% (39.6% plus the 3.8% Medicare surtax) for interest income or short-term capital gains.

8 Questions Grandparents Ask About 529 Plans

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It’s summer break and your little grandchildren are one year closer to college. Still haven’t set aside any funds for their college expenses? For grandparents who have the means to help with future tuition bills, the 529 College Savings Plan is a tremendous tool. Here are the Top 8 questions you need to ask when considering if a 529 is right for you.

1) What should I consider when selecting a 529 plan? 

The first step in choosing a 529 College Savings Plan is to determine if there is any benefit or incentive to using the “in-state” plan.  For example, if you are a Maryland resident, you can deduct up to $2,500 per beneficiary off your state income tax return if you participate in the Maryland 529 plan.  For married couples, you can deduct up to $5,000 per beneficiary per year.  If you have four grandkids, that is four beneficiaries, or $20,000 a year. And if you contribute more than these limits, your excess contributions carry forward for 10 years.  In other states, such as Texas and Florida, there are no tax benefits or credits for using the in-state plan, so in those states you might choose from any plan in the country.  The rules vary by state, so you will want to look up this information on www.savingforcollege.com.  
    
2) Are there any drawbacks or limitations to 529 plans that I should be aware of? 

Contributions to a 529 Plan are considered a gift by the IRS and are subject to gift tax rules.  For 2014, the gift tax exclusion is $14,000 per beneficiary.  However, 529 Plans have a special exception to this rule which allows you to fund five years of contributions in one year, or $70,000 per beneficiary ($140,000 per beneficiary if funded by a married couple). 

3) How do assets in a 529 plan impact my estate planning and eligibility for Medicaid? 

Assets in a 529 plan are excluded from your taxable estate, so if you are likely to be subject to the estate tax, 529 plans are a terrific tool to shelter assets from the estate tax while maintaining control of those funds.  Medicaid rules vary by state.  529s may be counted as assets in some states and may be subject to “look back” provisions by Medicaid.   

4) What if I end up needing the money in a 529 plan for my own medical expenses?

Since you control the assets in a 529 Plan, you can make a withdrawal at any time.  A 529 plan is revocable by the owner.  If the withdrawal is taken for a reason other than a qualified higher educational expense, any gains would be subject to income tax and a 10% penalty.  Note that the tax and penalty apply only to the gains, not to your principal.  If you have multiple 529 accounts, select the one with the lowest gains if you need a withdrawal, and then you can change the beneficiaries on the remaining accounts as needed.

5) How do 529 plans affect students’ eligibility for financial aid?

Grandparents’ assets are not disclosed on the Federal financial aid application (the FAFSA), so student financial aid eligibility is actually improved compared to having those same funds held in either the parents’ or student’s name.  Taking a distribution from the 529 plan is considered countable income on the FAFSA, so the best time to use the grandparents’ 529 is in the student’s final year of college. 

6) Can 529 plans be used to help pay for private high schools? 

No, 529 plans are only for post-secondary education.  Most of the time, 529 plans are used to fund undergraduate education at public or private colleges, but you can also use 529s for graduate school, community college, or even for a non-degree trade school.  To confirm if your school is an eligible institution check: http://www.savingforcollege.com/eligible_institutions/ 

7) How do 529 plans impact my taxes? 

Some states offer a state tax deduction for contributions to a 529 plan.  There are no federal tax deductions for 529 contributions, however, withdrawals for qualified higher educational expenses are tax free, so any future gains will not be taxable.  The earlier you establish a 529, the greater potential growth you may have in the account.

8) When does it make sense to pay for college tuition directly or give the money to my child or grandchild to pay for tuition instead of opening a 529 plan?

If a student is within a year or two of college, you may not see sufficient gains in a 529 account to receive much of any tax benefit.  529s are much more attractive when funded at an early age to allow for many years of growth.

While 529 contributions are subject to the gift tax rules, those limitations do not apply to payments made directly for education or medical expenses.  If the expenses are greater than the gift tax exclusion amounts, it may make sense to pay college expenses directly, rather than choosing to file a gift tax return and use up part of your lifetime unified exemption.  Money given to your children or grandchildren will be reported on the FAFSA, which could increase their expected family contribution and potentially reduce their eligibility for other sources of financial aid.  It would be preferable to pay the college tuition bill directly rather than giving money to your children or grandchildren.

If you want more information on 529 plans or would like to calculate how much it might cost to send Junior to Harvard, please email me for a free consultation.