You don't have to look very far to find alarming statistics on the rising cost of a college education. Costs have risen so quickly that concerned parents are already worrying about college tuition before their children start to walk. They're on the right track because starting early gives your money the greatest amount of time to grow. So if you haven't begun to save for college, no matter how old your future collegian, the time to start is now.
According to the College Board's Annual Tuition, Fees, Room and Board Study, for the 2003–2004 academic year, the average total charges (tuition, fees, room and board) at four–year public colleges and universities for 2003–04 is $10,636. Average total charges for four–year private colleges are now $26,854.
Among Historically Black Colleges and Universities (HBCUs), which give African American students an opportunity to have an educational experience in a community in which they are a part of the majority, costs are also rising. According to an article that appeared in the December 2002 issue of the University Faculty Voice (www.facultyvoice.com) for the 2002–3 academic year, costs at four–year public HBCUs increased 8.9 percent, with tuition and fees for in–state students amounting to $3,419. For out–of–state students, the figure rises to $8,452. At four–year private HBCUs, 2002–3 tuition and fees were $8,747.
When you consider that these are of course annual costs that must be multiplied by a factor of four to determine the total tuition, fees, room and board costs of a college education and that these figures all show signs of continuing to increase in the coming years, the numbers become nothing short of daunting.
Of course, college is a superior investment of both time and money. In fact, as the College Board points out (www.collegeboard.com) "according to US Census Bureau statistics, people with a bachelor's degree earn over 60 percent more on average than those with only a high school diploma. Over a lifetime, the gap in earning potential between a high school diploma and a B.A. (or higher) is more than $1,000,000. What this boils down to is that whatever sacrifices you make for your college education in the short term are more than repaid in the long term."
That's a reality more and more African American families are embracing. Despite rising costs, the January 2003 cover story of Black Enterprise magazine pointed out that, "According to Minorities in Higher Education 2001–02: Nineteenth Annual Status Report by the American Council on Education, enrollment of students of color at the nation's colleges and universities rose 48 percent between 1990 and 1999, with African Americans making up nearly 11 percent of all college students."
The Good News About Paying for College
The College Board Report also says that this year, a record $105 billion in financial aid is available to students and their families, an increase of 12 percent over last year. (Most financial aid comes from the Federal Department of Education (www.ed.gov) and is available as grants, work study programs, and loans. Contact your state department of education to find out about state aid programs.)
Insurance benefits from a permanent life insurance policy can help pay for a child's education in the event of your death. In addition, if it is determined that the full death benefit is no longer needed, the available cash value in a permanent life insurance policy may be accessed through policy loans to help pay for education expenses. Please keep in mind that loans against the cash value accrue interest and decrease the cash value and death benefit by the amount of the outstanding loan plus interest.
And there's more good news, because today there are more tax–advantaged ways to save for college than ever.
Here are some suggestions for how to go about building a college savings plan.
Create a strategy that matches your needs. The best way to save for college depends on a variety of issues including how far away college is, your income, your risk tolerance, how much you have available to set aside for college, your other savings and investment plans, and other factors. Work with a financial professional to build a savings and investment strategy that matches your needs and takes maximum advantage of tax–advantaged college savings vehicles.
Check periodically to be certain your plan continues to match your needs. Be aware of tax law changes that can affect your savings options. Check in periodically with your financial professional to be certain your college savings strategy continues to match your needs and goals.
Know your options. In recent years, the tax law has made a variety of college savings options available to students and their families, including:
Section 529 Plans*
These are state–run savings plans that enable you to put money aside for education that grows on federal tax free basis. A 529 plan is an investment program. The state selects the investments included in the program. Some states may let you choose from a list of investment options while others offer only an investment package.
Potential investors of 529 plans may get more favorable or other tax benefits from 529 plans sponsored by their state. Consult your tax advisor for how 529 tax treatment would apply to your particular situation.
You don't have to be a parent to open a 529 account. Anyone can put money into a 529 plan on behalf of a future student. You can even open one for yourself if you're considering college for yourself.
The money you put into a 529 account is taxable, but as of 2002, all earnings in these plans are exempt from federal taxes if they're used to pay for qualified educational costs. Many states also offer similar tax advantages and some may let you deduct the contributions to the account as well if you invest in your home state's plan.
Section 529 plans do however have a certain amount of complexity. Some states have a residency requirement as well as a rule about the amount of time money must remain in the plan before it can be withdrawn tax–free. Plans can have enrollment and annual management expenses and fees. And, it's important to realize that 529 plans do include a measure of risk because the value of the account will depend on the performance of the investments included in the plan's portfolio.
Coverdell Education Savings Accounts (formerly called Education IRAs)
These are IRAs parents can use to save for a child's education. In 2002, the per child annual contribution limit rose to $2,000 per child. There are income limits for parents who would like to contribute to these accounts, and contributions must stop when the child reaches 18. The contribution itself is taxable, but the gains are tax free if the money is used to pay for qualified education expenses.
Note that these savings accounts do not limit the amount you can contribute to other IRAs you may have, and you can contribute to an Education IRA and a Section 529 plan in the same year. In contrast to a 529 plan, however, you can use the money in an Education IRA to pay for private and religious elementary and secondary schools.
As with any IRA, within an Education Savings Account, you can self–direct the investments.
Prepaid Tuition Plans
The notion of Prepaid Tuition Plans is that parents' investment in the plan buys a certain number of tuition credits at a college or university at today's costs. Parents are in effect locking in the cost of college and insulating themselves from rising college costs by investing in a prepaid tuition plan. Parents—or really anyone with an interest in the child's educational future, including grandparents, aunts, uncles, etc.—select the type of college (two– or four–year) and the number of semesters or years their budget permits them to buy. Of course, the size of the payment will depend on the number of years until the child will attend college.
Custodial accounts were enabled by the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act, both of which enable tax–free money or asset transfers to children within certain limits. Parents, grandparents, relatives, and friends can open these accounts in the child's name. Custodial accounts are funded with gifts of money, within allowable limits. The money may then be used to buy stocks, bonds, annuities, or other investments. Taxes on the gains in a Custodial Account are small until the total gains reach a specified limit. After that, the gains are taxed as income.
These popular savings vehicles, most often intended for retirement savings, may also be used to save for college expenses. Contributions to a Roth can be withdrawn at any time without tax or penalty. You can also withdraw earnings to pay for college expenses without penalties, though you will still have to pay tax on this money unless you're over 59½.
For withdrawals not used for qualified higher education expenses, earnings are subject to income taxes at the distributor’s rate plus a 10% federal tax penalty.
Please contact your financial professional for more information on 529 plans and/or obtain the appropriate disclosure statements and the applicable prospectuses for the underlying investments of the 529 Plans we have available. Investors are asked to consider the investment objectives, risks, charges and expenses of a portfolio carefully before investing or sending money. The disclosure statements and prospectuses contain this and other information about the investment options and their underlying investments. Please read this material carefully before investing or sending money.
Neither New York Life nor any of its financial professionals are in the business of offering tax advice. You should consult with your professional advisors to examine tax aspects of any topics presented.
*Offered by properly licensed registered representatives.
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