Financial Planning for September 2005
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Financing Your College Education -
Talk About a Huge Cash Outflow
Talk About a Huge Cash Outflow
This month, we have been talking about cash outflows. In other words, the feeling you get each pay period when the bills are higher than your income. If you have children for whom you plan to provide college funds, we hope you began saving five years before each was born.
According to the Princeton Review, the average cost of a private college in 2005 will be $28,769 and the average annual cost of a public university will be $10,810. Assuming a 5% inflation rate, a student entering college this year will pay approximately $124,000 for a private college education or $47,000 for an education at a public university. This may seem a little high given our recent history for the Consumer Price Index, but according to statistics from the College Board and Digest of Education Statistics, inflation in higher education averaged approximately 7% per year between 1958 and 2000 versus a Consumer Price Index average of 4.3%. Put another way, it takes $18.59 in 2000 to get what $1 would have gotten you in 1957. That’s enough to knock anyone’s socks off. Not only that, but the inflation in college costs is expected to average between 7% and 8%. Ouch!
Ok, that’s the bad news. We figured it was easier to get it out of the way so you could enjoy the rest of the article, because there is hope.
United States Government Financial Aid
The United States Department of Education (DOE) administers various programs to assist students in financing their post-secondary education. Grants are used primarily for programs to enhance primary and secondary education. Pell Grants will provide up to $4,050 for qualifying students in the 2005-2006 academic year, while Federal Supplemental Educational Opportunity Grants will provide $100 to $4,000 per year for qualifying students. In addition to these grants, the DOE sponsors various government backed loan programs to help finance education expenses. There are various requirements for eligibility, much of which depend on financial need.
State Sponsored Programs
Most, if not all, states have in place a state sponsored 529 plan. There are two types of programs: 1-Prepaid Tuition Plan and 2-College Savings Plan. Prepaid tuition plans are those where you lock-in the cost of your education based on current rates. Generally guaranteed by the sponsoring state, prepaid plans limit you to in-state public universities and colleges. College savings plans are sponsored by state governments and are simply a vehicle for savings, but with a few twists. Contributions to such plans do not provide tax deductions; however, some states allow a deduction from taxable income or credits against state tax for contributions to 529 plans. The beauty of the 529 college savings plan is there is no tax on earnings accumulation and private as well as public institutions may sponsor a plan. You are also not limited to in-state institutions when utilizing your 529 plan funds.
In addition to 529 plans, in most states, an in-state resident of the state will generally pay a lower tuition rate than an out-of-state resident. And of course, all colleges and universities have scholarships available for qualifying students.
Scholarships
Don’t limit your scholarship searches to those in your anticipated college. There are a number of web sites that assist college hopefuls in locating scholarship money. Sites like Salaries.com, Findtuition.com and others assist you in locating scholarships either for general coursework and specific majors or any number of additional factors. Be sure to ask your child’s guidance counselor for any resource materials.
Savings
Now we are down to the nitty-gritty - your money. What do you do about all those expenses after you have exhausted all other possibilities? Hopefully, you have been able to establish and fund your child’s college education through a savings vehicle. There are various possibilities:
Coverdell Education Savings Account - If you choose, and you should, to invest up to $2,000 annually in an Coverdell Education Savings Account, you will be able to make your non-tax deductible contribution and earn the investment income tax-free. As long as any withdrawals are used for qualified tuition, the withdrawals will carry no tax. Any unused funds can be transferred to a separate beneficiary.
Uniform Gift To Minors Act - The UGTMA allows you to gift money to an account for investment purposes. While the funds may be used for anything and the contributions are not deductible, this can be an effective way to get money out of your estate and start saving for your child’s education. It is possible that the earnings will be taxable once they reach the applicable limit for the kiddie tax, but this is no different than having a normal account in your own name.
Conclusion
Our discussion this month has just touched the surface of funding and planning possibilities for your child’s education. Give us a call to discuss your needs.
Have a great September.
According to the Princeton Review, the average cost of a private college in 2005 will be $28,769 and the average annual cost of a public university will be $10,810. Assuming a 5% inflation rate, a student entering college this year will pay approximately $124,000 for a private college education or $47,000 for an education at a public university. This may seem a little high given our recent history for the Consumer Price Index, but according to statistics from the College Board and Digest of Education Statistics, inflation in higher education averaged approximately 7% per year between 1958 and 2000 versus a Consumer Price Index average of 4.3%. Put another way, it takes $18.59 in 2000 to get what $1 would have gotten you in 1957. That’s enough to knock anyone’s socks off. Not only that, but the inflation in college costs is expected to average between 7% and 8%. Ouch!
Ok, that’s the bad news. We figured it was easier to get it out of the way so you could enjoy the rest of the article, because there is hope.
United States Government Financial Aid
The United States Department of Education (DOE) administers various programs to assist students in financing their post-secondary education. Grants are used primarily for programs to enhance primary and secondary education. Pell Grants will provide up to $4,050 for qualifying students in the 2005-2006 academic year, while Federal Supplemental Educational Opportunity Grants will provide $100 to $4,000 per year for qualifying students. In addition to these grants, the DOE sponsors various government backed loan programs to help finance education expenses. There are various requirements for eligibility, much of which depend on financial need.
State Sponsored Programs
Most, if not all, states have in place a state sponsored 529 plan. There are two types of programs: 1-Prepaid Tuition Plan and 2-College Savings Plan. Prepaid tuition plans are those where you lock-in the cost of your education based on current rates. Generally guaranteed by the sponsoring state, prepaid plans limit you to in-state public universities and colleges. College savings plans are sponsored by state governments and are simply a vehicle for savings, but with a few twists. Contributions to such plans do not provide tax deductions; however, some states allow a deduction from taxable income or credits against state tax for contributions to 529 plans. The beauty of the 529 college savings plan is there is no tax on earnings accumulation and private as well as public institutions may sponsor a plan. You are also not limited to in-state institutions when utilizing your 529 plan funds.
In addition to 529 plans, in most states, an in-state resident of the state will generally pay a lower tuition rate than an out-of-state resident. And of course, all colleges and universities have scholarships available for qualifying students.
Scholarships
Don’t limit your scholarship searches to those in your anticipated college. There are a number of web sites that assist college hopefuls in locating scholarship money. Sites like Salaries.com, Findtuition.com and others assist you in locating scholarships either for general coursework and specific majors or any number of additional factors. Be sure to ask your child’s guidance counselor for any resource materials.
Savings
Now we are down to the nitty-gritty - your money. What do you do about all those expenses after you have exhausted all other possibilities? Hopefully, you have been able to establish and fund your child’s college education through a savings vehicle. There are various possibilities:
Coverdell Education Savings Account - If you choose, and you should, to invest up to $2,000 annually in an Coverdell Education Savings Account, you will be able to make your non-tax deductible contribution and earn the investment income tax-free. As long as any withdrawals are used for qualified tuition, the withdrawals will carry no tax. Any unused funds can be transferred to a separate beneficiary.
Uniform Gift To Minors Act - The UGTMA allows you to gift money to an account for investment purposes. While the funds may be used for anything and the contributions are not deductible, this can be an effective way to get money out of your estate and start saving for your child’s education. It is possible that the earnings will be taxable once they reach the applicable limit for the kiddie tax, but this is no different than having a normal account in your own name.
Conclusion
Our discussion this month has just touched the surface of funding and planning possibilities for your child’s education. Give us a call to discuss your needs.
Have a great September.
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