By H. William Wolfson, DC, MS, MPASSM, CFP®
Going to college is a goal for many students graduating high school. According to the U.S. Bureau of Labor Statistics, “In October 2017, 66.7 percent of 2017 high school graduates age 16 to 24 were enrolled in colleges or universities. Among persons age 20 to 29 who received a bachelor's degree in 2017, 77.6 percent were employed.” The full realization of how much college costs may only be fully grasped after receiving an acceptance letter. Unfortunately, unless financial planning starts years earlier, many students’ dreams may be dashed, or cumbersome borrowing could become a burden that follows them for years to come.
The Unrealized Facts and All Too Real Need
According to financial writer Lee Barney, “Fifty percent of Americans are not saving anything on an annual basis for future education expenses. Only 41 percent of parents with children younger than 13 are saving for future education costs.” Considering the costs associated with attending college and the expected continual increase in tuition and related expenses, most Americans are woefully underfunding this needed future cash flow.” As troubling, Barney points out, “Only 29 percent of Americans know that 529 plans are an education savings tool. ... This is down from 32 percent in 2017.” The reality is stifling and can cause even those with the best intentions to be sidelined by fear, inaction or hoping for a financial miracle.
How much should be saved for a child born today and beginning college in 18 years? According to CollegeCalc.org, the cost of a four-year degree “is estimated to be priced at $442,697.85 for students enrolling in 2036 if tuition increases an average 7 percent per year until then. Assuming you have no current college savings, monthly deposits of $874.69 into a 529 or other college savings plan earning an after-tax or tax-exempt return of 7 percent will be necessary to achieve this balance.” Much also depends on which school is selected, any scholarships awarded, total costs, loans taken, return on investments, and so many other important factors. How does one prepare?
Qualified Tuition Programs (QTP)
In order to spur savings for education, the Qualified Tuition Programs (QTP) law was passed, allowing for savings and spending for educational purposes. Since its initial passing, modifications have been made to the law that expanded its many uses and benefits. Best known as 529 plans (Section 529 of the Internal Revenue Code), the IRS states that “[t]hey are investment vehicles designed to help families pay for future expenses associated with college or other qualified post-secondary training. Though contributions to a 529 plan are not deductible, these plans offer other tax advantages. All 50 states and the District of Columbia sponsor at least one type of 529 plan.”
The U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy further noted, “Many states offer direct-sold education savings plans in which savers can invest without paying additional broker-charged fees ... [and that] will waive or reduce the administrative or maintenance fees if you maintain a large account balance, participate in an automatic contribution plan, or are a resident of the state sponsoring the 529 plan.” 529 plans should be treated as an investment and, as such, costs should be known and monitored during participation.
529 Plan Basics
A 529 plan is basically an account that an individual opens in a state (their own or another that accepts out-of-state resident contributions) or with an eligible education institution. A custodian or plan owner controls the account. The designated beneficiary is the person who benefits when accessing the 529 plan. Beneficiary designations may be changed within a family for others to have access to the 529 plan. Contributions deposited into the account are not tax deductible; however, earnings are not subject to federal tax if used for qualified education expenses as allowed by the IRS Code. Each state decides if earnings are considered taxable within its respective jurisdiction. Additionally, some states allow a state tax deduction for contributions made to a 529 plan.
In 2018, an annual gift tax excluded amount of $15,000 may be contributed by any donor to a 529 plan account. Married couples may jointly contribute $30,000. 529 plan rules allow a one-time lump sum deposit of five years times the annual tax exclusion amount (currently 5 x $15,000) to remain gift-tax free. If married, this amount can be doubled.
529 Plan Qualified Savings Options and Expenses
529 plans allow for two savings options--prepaid tuition or savings plan. Not every state allows for the benefit of a prepaid tuition option. For those who are deemed the designated beneficiary of the 529 plan when enrolling in an eligible education institution, qualified and allowable expenses are waived (paid). Similarly, a 529 savings plan allows for payment of qualified education expenses at the time they are incurred. States may offer either or both saving options.
Qualified expenses include, but are not limited to, tuition, fees, books, supplies, equipment and more. Allowances may include specific allowable items used while attending school at least part-time. In addition to college, 529 plans allow for payment if a student is enrolled at an eligible elementary or secondary school. In 2018, up to $10,000 per student in an academic year may be withdrawn. According to the IRS Code, “An eligible elementary or secondary school is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12).” However, the rules remain specific that 529 plan payments are only to be used for qualified expenses. Furthermore, “No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses.”
Non-qualified expenses include, but are not limited to, insurance, transportation, student health fees or medical-related expenses and more. The SEC states, “If 529 account withdrawals are not used for qualified higher education expenses or tuition for elementary or secondary schools, they will be subject to state and federal income taxes and an additional 10 percent federal tax penalty on earnings.”
According to financial writer Greg Iacurci, “There are about 100 529 plans, all with different investments, glide paths and state rules governing them.” (When picking a 529, lacurci recommends 7 Things to Check.)
Other Funding Options
The following additional college funding options can be applied toward eligible and qualified college education costs, but each may have specific parameters for their expenditure. Consulting with a knowledgeable financial professional can help with determining a best-options approach. The goal is to avoid a potential tax issue or any prohibited double benefit (dipping) scenario.
- Private Lenders
- Federal Plus Loans
- Federal Perkins Loans
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
Career Path Options
Working while in school may help alleviate some financial stress—and potentially reduce money owed in the future. Some may also consider attending a local community college with lower tuition costs, obtaining an applied associate’s degree or certification to enter straight into the workforce, or obtaining an associate’s degree that can be transferred to a four-year institution.
According to financial writer Yasmine Mian, “Not everyone is college material, as well. Over 54 percent of Americans who enroll in college eventually drop out. College is hard enough as it is for those who are motivated and excited to be there, so for people who don’t really want to be there, it is almost impossible.” For many, the option of attending a technical program and graduating job-ready seems to work. There are programs offered at two-year, four-year, public and private education institutions. When choosing one’s career path, costs, job placement statistics after graduation, and transferability of earned credits should be carefully considered.
Opportunities abound for those who research the available options and develop a clear picture regarding their goals for a selected occupation or profession. Remaining flexible and consulting with knowledgeable professionals before beginning the college journey should be part of any plan. The key is to begin earlier rather than later, leave no options unexplored, and seek assistance before the process becomes overwhelming.
Dr. Wolfson is a financial consultant and advisor. He retired after 27 years of active chiropractic practice. Dr. Wolfson can be reached at (631) 486-2792 or firstname.lastname@example.org. View more published articles here.