Parents Need to Get Ahead of Rising College Costs
by Jared White on Jan 8, 2019
Along with most consumer prices, college tuition costs are heating up again. It seems as though we have become accustomed to college cost increases that have outpaced the rate of inflation; however, recent data shows them rising at an even more alarming rate into the double digits in many states and as high as 30% in California. At this rate, the cost of a college education could be beyond the reach of most parents in the near future. That is, unless parents take full advantage of the college savings plans that have been created over the years.
The good news is that parents do have several good options available to them, and most of them offer attractive tax incentives to ease the load that they must bear. Established through federal legislation, qualified college savings plans can enable you to use money that you would have otherwise paid in taxes towards growing your college savings faster. Some plans even enlist the help of states or college organizations in providing tuition guarantees regardless of how high tuition cost rise.
But all college savings plans are not created alike. They differ in tax treatment, flexibility, and savings options, so it important to find one that most closely matched your particular needs. Each plan type should be considered with your tax situation, savings ability and your college preferences in mind. This quick overview can be used as a starting point for narrowing your selection:
Qualified College Savings Plans
Created by Congress to assist parents in targeting college tuition costs, these plans include tax advantages that encourage systematic savings. Although contributions are not tax deductible , they do allow for deferred taxation on earnings, and, if certain requirements are met, they are also exempt when withdrawn to pay for college expenses. 529 plans are offered on a state level and also by some universities or college organizations, and they vary somewhat in the way they structured,
529 plans are structured in two different ways: as a college savings plan, and as a pre-paid tuition plan. College savings plans are accounts established through qualified providers that allow for savings to accumulate within various investment options. Most are set up as a family of mutual funds so funds can be diversified among different investment options. As with any mutual fund investment, 529 College Savings Plans should be carefully reviewed for a complete understanding of the costs and risks associated with the investments.
Pre-paid tuition plans are structured differently in that contributions go towards the purchase of credit directly with a college or university. The cumulative credits are then applied to tuition, and where allowed, other college related expenses. A formula is established up front to determine how many credits need to be accumulated based on a rate of inflation and minimum rate of interest. In some cases, the sponsoring institution will guarantee the tuition coverage even if the costs exceed those established in the formula.
There are some caveats and restrictions that parents need to review before committing to a pre-paid tuition plan. First, the credits can only be applied to schools within the state, or, with a private plan, only to schools participating in the program. In addition, many states are rethinking the guarantees provided in the plan, so it’s possible that your credits may come up short.
It is important to understand how financial aid programs work when considering which type of college savings plan to utilize. Generally, financial aid availability is based on the amount of assets that are held in the student’s name. If the assets are held in the parents’ name they are exempt from the eligibility requirements. Assets held in trust for a child, could affect eligibility for assistance.
Parents have several options for federal grants available through the federal government. Grants are generally paid to students through the colleges and they don’t require repayments.
Pell Grants: Available for undergraduate students
Federal Supplemental Educational Opportunity (FSEOG): Aid for low-income students pursuing post-graduate education.
National Science & Mathematics Access to Retain Talent Grant (National SMART Grant): A recently funded aid program for college juniors and seniors majoring in math, the sciences or engineering.
Student eligibility is determined at the time of application, but you can plan in advance by using the tools available at www.studentaid.ed.gov.
Setting up a college savings plan doesn’t have to be complicated, and any plan can be tailored to your specific needs and budget. If time is still on your side, it is important to take advantage of it because it is valuable and wasting resource. It is always advisable to seek the guidance of a qualified and trusted financial professional to gain a clear understanding of how these plans work in your situation.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.