Investing in a Future and
Recognizing It Is an Investment
Families need to plan for the many costs associated with a
college education beyond tuition such as books, supplies,
equipment, and room and board. Over the last 10 years, college
costs have risen at a rate nearly double general inflation.
According to the College Board, this year college inflation
is 6.02 percent, and the average cost of one year of private
college - including tuition, fees, room and board - is
$35,272. Tuition, fees, room and board at a public college
cost $15,167, with tuition alone cost $6,709. Ten years from
now, a student going away to a public scpay $120,000 for his/her diploma.
Yet, the return on investment for a college education is undisputed. In the recent
College Board study “Education Pays” it was reported that a college graduate earns $1
million more over a lifetime than a high school graduate. Other studies suggest a much
wider margin. Furthermore, they reported college graduates were found to be healthier
and better citizens, contributing to civic activities such as voting and volunteerism.
How Do I Pay for It? Financial Aid, Loans, Savings Programs
The world of student financial aid has changed dramatically since most of us
went to college. Today, eighty percent of all financial aid comes from the federal
government, most in the form of grants or student (or family) loans. Grants, a form
of gift aid, are available for families based on need as identified through the Free
Application for Federal Student Aid (FAFSA). Loans subsidized by the federal
government are also income based. Many families must also take out private loans
to finance their children’s higher education.
“Students that do well in high school can open up a host of scholarship
opportunities”, says Terri Eckel, director of financial aid for Prescott College
and board president for the Arizona Association of Student Financial Aid
Administrators. She encourages everyone she advises to investigate scholarship
opportunities - a funding source that she says is extremely important for those
middle income families who earn too much to qualify for federal financial aid.
Those counting on financial aid alone, however, may be in risky territory. Early
savings is no doubt the best tactic, but it’s never too late to begin.
College Savings (529) Plans are arguably the best way to save for college. The
529 plan offers parents, grandparents, relatives and friends a tax-advantaged
way to invest for a child’s higher education. Account earnings grow tax-deferred
and withdrawals are tax free if the money is used for qualified higher education
expenses. This benefit of tax-free earnings was recently made permanent for 529
plans through the Pension Protection Act of 2006.
The beneficiary of a 529 plan can attend any accredited college, university, or
vocational school in the United States and some institutions outside of the country.
A Little Goes a Long Way
Having a nest egg that can grow right alongside your child from birth certainly
will go a long way in funding a college education. But tucking dollars away early
isn’t always feasible, experts acknowledge. What’s important to remember, they
say, is the old adage that every penny counts and it helps to start early in the saving
process. And when saving for college, this means the earlier families begin, the less they will need to rely on other means to fund a college education, be it depleting savings accounts or other financial resources, home equity, student loans or financial aid.
529 Advantages
- Easy to open and manage: Everyone is eligible. There are no income or age restrictions, and College Savings Bank’s 529 plans have initial contribution amounts as low as $100 a month.
- Favorable tax treatment: Earnings on funds invested in a 529 plan grow tax-free while in the plan. Distributions are tax free, as long as the proceeds are used for qualified higher education expenses. Qualified expenses include tuition, fees, books, and eligible room and board costs at an accredited educational institution.
- Account flexibility: Anyone can open an account and the proceeds can go toward any accredited educational institution, whether it’s public, private, two-year or four-year. They are for anyone - even yourself, and there is no requirement that you pick the state in which you reside, although there may be some advantages to doing so.* Keep in mind, too, that the beneficiary does not need to attend a school in the state of the chosen plan.
- Limited impact on financial aid: Program assets will be considered
if the student applies for state or federally sponsored financial aid or scholarships. However, if the account is owned by the parent, account balances are generally included in the assets of the parents rather than the student. Assets owned for the sole benefit of the student will not be treated as the student’s assets for financial aid purposes.
- Transferable: If the beneficiary of a 529 plan decides not to attend college, the account proceeds are transferable to another member in the beneficiary’s family.