The cost of a college education can be high-sometimes very high. According to the College Board's study1, the average total cost (including tuition, fees, room and board) for 2010-2011 is $16,140 at a four-year in-state public college and $36,993 at a four year-private non-profit college.
When you consider that these are annual figures and must be multiplied by four to calculate the total cost of a four year degree, it's no wonder that how to pay for college is among parents' top concerns today. And the costs will continue to rise according to National Center for Education Statistics (http://www.nces.ed.gov/), between 1997-1998 and 2007-2008, prices for undergraduate tuition, room, and board at public institutions rose by 30 percent, and prices at private institutions rose by 23 percent, after adjustment for inflation.
The $1 Million Difference
At the same time, a college degree is a superior investment of both time and money. College provides an educational challenge that sparks curiosity and a lifelong thirst for learning. And according to The College Board Study2, "the typical bachelor's degree recipient can expect to earn about 61 percent more over a 40-year working life than the typical high school graduate earns over the same period. The typical expected earnings over the working lives of four-year college graduates add up to $800,000 more than the expected earnings of high school graduates. If college graduates who also earn higher degrees are included, the lifetime earnings premium is over $1,000,000."
The Time to Start is Now
How and when families begin to save for college makes a substantial difference in the amount of money that will be available for and the range of choices a student will have. Starting early gives the money set aside the greatest amount of time to potentially grow.
A survey released in June 20093 reveals that college savings concerns currently are or will affect the daily lives of 83% of parents, with 64% actively making changes to their current spending habits. The survey also finds that 92% of U.S. parents expect to have to pay for their children's college education but more than half (57%) do not believe that they will be able to save enough money to afford college for their children.
Parents Are Worried About Being Able to Afford College3
92% of parents surveyed expect to pay for their child/children's college education and most (90%) are currently facing obstacles saving. Nearly two thirds of those surveyed (62%) are depending on scholarships, loans, grants and/or financial aid while more than half of parents (53%) surveyed expect that their child/children will need to reconsider their college and/or university choices based on cost.
More Parents Are Struggling to Save for College in This Economy3
60% of parents say that the economy is affecting their ability to save for college, a nearly 20% increase from the year before. Of those, nearly one out of every two parents (45%) have stopped or decreased contributions to college savings. Forty-two percent (42%) say they have not started saving for their children's college education at all and, of those, 65% claim that they do not have room in their budget to put money away for college, up 18% from a year ago, and 45% said that they need to worry about more pressing financial concerns.
College Savings Concerns Are Having a Real Impact on the Economy3
83% of parents cite that college savings concerns are currently affecting their daily lives or expect it to in the future, with 64% actively making changes in their spending habits due to these concerns including spending less on dining and eating out (47%), spending less in the holiday season (42%) and taking fewer vacations in the summer or spending less on the vacations they do plan to take (42%).
Building a College Savings Plan
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 many years 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.
Consider the role of permanent life insurance. Insurance benefits from a permanent life insurance policy can help pay for a child's education in the event of your death. In addition, the available cash value that may accumulate in a permanent life insurance policy may be accessed through policy loans to help pay for education expenses if it is determined that the full death benefits is no longer needed. Please keep in mind that loans against the cash value in your policy accrue interest at the current rate and decrease the death benefit and cash value by the amount of the outstanding loan and interest.
Be aware of grants and loans that may be available. A College Board's study4 reports that in 2009-2010, $199.2 billion in financial aid was distributed to undergraduates and graduate students in the form of grants from all sources, Federal Work-Study, federal loans, and federal tax credits and deductions. In addition, students borrowed an estimated $8.5 billion from state and private sources.
Know your savings options. In recent years, the tax law has made a variety of college savings options available to students and their families, including:
Section 529 Plans5
A 529 Plan is a state-run educational savings plan that enables you to put money aside for higher education that has the opportunity to grow on a tax-deferred basis as long as the plan satisfies the basic requirements. The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee a college funding goal will be met. 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.
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. An eligible account owner may include an individual, a trust or estate, a partnership or LLC, an association, a corporation, or a 501(c)(3) charitable organization. You can even open an account for yourself if you're considering college for yourself.
The money you put into a 529 account is not tax deductible, but as of 2002, all earnings in these plans are exempt from federal income 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. Be sure to check with your tax advisor about any tax benefit relating to investing in your home state's 529 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 the money must remain in the plan before it can be withdrawn tax-free. You should check with each individual state you are interested in opening a 529 account for information. 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.
Please contact your financial professional for more information on 529 plans and/or to obtain the appropriate plan description document 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 plan description document 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.
529 Plan Disclosure
State tax treatment varies. Tax or other benefits from plans sponsored by your own state may be more favorable.
For withdrawals not used for qualified higher education expenses, earnings are subject to income taxes at the distributee's rate plus a 10 percent federal tax penalty on the gains portion. Please keep in mind there are fees, charges, and tax ramifications associated with a 529 plan and the underlying investment options are subject to market risk and will fluctuate in value.
Coverdell Education Savings Accounts (formerly called Education IRAs)
These are savings accounts parents can use to save for a child's education. The annual contribution limit is $2,000 per child. There are eligibility requirements and 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 non-deductible, but the earnings are federally tax free if the money is used to pay for qualified education expenses. For withdrawals not used for qualified education expenses, a 10% federal tax penalty will apply.
Note that these savings accounts do not limit the amount you can contribute to other college savings plans you may have, and you can contribute to a Coverdell Education Savings Account (C-ESA) and a Section 529 plan in the same year. In contrast to a 529 plan, however, you can use the money in a C-ESA to pay for private and religious elementary and secondary schools. In addition, within a C-ESA, you can self-direct the investments.
Note that Congress has extended the improvements made to the Coverdell ESA for two years. So, now the expiration of improvements made to Coverdell ESA by the 2001 Tax Act is December 31, 2012.
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. Individuals can give up to $13,000 ($26,000 if married) each year to a minor. Assets are included in the donor's estate, when the donor is also the custodian. 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. These accounts are governed under the laws of the state in which the account is established. Check with your tax advisor about the taxation of these accounts.
Note that unlike a 529 College Savings Plan or a Coverdell Education Savings Account, a Custodial Account is considered an asset of the child and this has a higher weighting in the financial and eligibility formula,6 limiting a child's eligibility for financial aid.7
With proper planning, college costs can be manageable, meet with a New York Life financial professional for a no-obligation, no-cost consultation. To determine which college saving option is right for you, please consult your tax and accounting advisors. Neither New York Life Insurance Company nor its affiliates or financial professionals provide tax, legal or accounting advice.
1Trends in College Pricing, College Board, http://www.trends.collegeboard.org/
22007 Education Pays: The Benefits of Higher Education for Individual and Society, by Sandy Baum and Jennifer Ma, College Board, http://www.collegeboard.com/html/trends/
3FUTURETRUST(r) HOPES & DREAMS Survey Reveals College Savings Concerns are Impacting Spending Habits and Economic Recovery, June 24, 2009, http://news.prnewswire.com/ViewContent.aspx?ACCT=109&STORY=/www/story/06-24-2009/0005049332&EDATE=
4Trends in Student Aid, College Board, http://trends.collegeboard.org
5Offered by properly licensed Registered Representatives of NYLIFE Securities LLC (Member FINRA/SIPC) A Licensed Insurance Agency, a wholly owned subsidiary of New York Life Insurance Company.
6Compare College Savings Options, http://personal.fidelity.com/planning/college/content/compare_options.shtml.cvsr
7Custodial Accounts, http://www.collegeboard.com/prod_downloads/highered/res/cc_tips/Custodial05.pdf
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