Raleigh NC Financial Advisor: College Costs
Despite the increasing cost of college education over the years, its importance to most parents remains undiminished. Paying for college is an expensive affair, and many families have felt the impact of rising tuition costs. In fact, some parents ranked saving for college as their top savings priority, even surpassing retirement.
According to a recent study, many families are failing to meet their intended college savings goals. While the average parent hopes to pay for 69% of their child's education, they are only on track to meet 27% of that target. Gaining a realistic understanding of how much college may cost is an important part of making a realistic plan for how to pay for it.
What does college really cost?
The cost of college can vary greatly depending on various factors such as the type of college or university, location, program of study, and other additional expenses. Generally, the cost of attending college includes tuition, fees, room and board, textbooks and supplies, transportation, and personal expenses.
According to data from the National Center for Education Statistics, the average cost of tuition and fees for the 2020-2021 academic year was $10,560 for public four-year in-state colleges and $37,650 for private non-profit four-year institutions. However, it's essential to keep in mind that these costs are subject to change, and specific colleges or universities may have different tuition and fee structures.
Students who attend local community colleges for an associate's degree and then move on to earn a bachelor's degree at an in-state college may be able to complete their college education for a fraction of the cost of a private, 4-year college, and at a significantly lower cost than a 4-year public college.
Saving for College
Getting an early start on college savings is one thing you can do to help yourself. The earlier you start saving, the more time your college savings portfolio will have to potentially grow. With money set aside, your child can make their college choice based on where they’re most likely to thrive, rather than on financial considerations only. There are several options for families to save for college.
529 Savings Plan
A 529 plan is a tax-advantaged savings plan specifically designed to encourage saving for education expenses. 529 College savings plans allow families to contribute funds to an investment account that grows tax-free and can be withdrawn tax-free when used for qualified education expenses. Qualified education expenses can include tuition, fees, books, supplies, and room and board for eligible institutions.
Contributions to a 529 plan are not tax-deductible, but the earnings on the account grow tax-free, and withdrawals used for qualified education expenses are also tax-free at the federal level. Some states also offer state tax deductions or credits for contributions to a 529 plan.
529 plans have become a popular way to save for education expenses, as they offer a flexible, tax-advantaged way to save for college. However, it's essential to understand the rules and limitations of the plan, such as investment options, fees, contribution limits, and eligible expenses, before opening a 529 plan.
Coverdell Education Savings Account (ESA)
An ESA is a tax-advantaged savings account designed to cover education expenses for children under 18. Contributions to an ESA grow tax-free, and withdrawals used for qualified education expenses are also tax-free. Unlike 529 plans, which are sponsored by states and are available through banks, brokerage firms, and other financial institutions.
The maximum annual contribution limit for a Coverdell ESA is $2,000 per year per beneficiary, and the account must be established before the beneficiary reaches age 18. The account must be used for qualified education expenses before the beneficiary reaches age 30, or the account will be subject to taxes and penalties.
One benefit of a Coverdell ESA is that it offers a wider range of investment options than a 529 plan. However, there are income limits for contributions, and not all financial institutions offer Coverdell ESAs. It's essential to understand the rules and limitations of a Coverdell ESA before opening an account. Consult with a financial advisor to determine if a Coverdell ESA is the right savings option for your education savings needs.
Uniform Gifts Transfer to Minors Act (UTMA/UGMA)
A Uniform Transfers to Minors Act (UTMA) account is a type of custodial account established for minors. It allows adults, such as parents or grandparents, to gift assets to a child, who then owns the assets once they reach the age of majority in their state (usually 18 or 21 years old). UTMA accounts are a popular way to transfer assets to minors because they offer tax advantages. Income generated from the account is taxed at the child's tax rate, which is often lower than the adult's tax rate.
One disadvantage of a UTMA account is that once the child reaches the age of majority, they have complete control over the assets in the account. There is no requirement that the funds be used for education expenses or any other specific purpose. Additionally, UTMA accounts can affect a child's eligibility for financial aid, as the assets are considered the child's assets and may impact their expected family contribution (EFC).
It's essential to consider the advantages and disadvantages of a UTMA account before opening one. Consult with a financial advisor to determine if a UTMA account is the right savings option for your needs.
Roth IRA
A Roth IRA is a retirement savings account, but it can also be used to save for college. One benefit of using a Roth IRA for college savings is that contributions to the account can be withdrawn at any time without penalty or tax. However, earnings on the contributions must be left in the account until age 59 ½ to be withdrawn tax-free. If withdrawals of earnings are made before age 59 ½, they may be subject to taxes and penalties, unless used for qualified education expenses.
Qualified education expenses include tuition, fees, books, supplies, and room and board for eligible institutions. In addition to college expenses, Roth IRA funds can also be used for K-12 education expenses, as well as for vocational or trade schools.
Another benefit of using a Roth IRA for college savings is that it does not affect a student's eligibility for financial aid. Roth IRA contributions are not considered when determining a student's expected family contribution (EFC).
It's important to note that Roth IRAs have contribution limits of $6,000 per year (as of 2021), with an additional $1,000 catch-up contribution for individuals age 50 and over. Additionally, there are income limits for contributing to a Roth IRA. Consult with a financial advisor to determine if a Roth IRA is the right college savings option for your needs.
Bottom Line
Saving for college can be challenging, but there are various options available to help you achieve your goals. Each option has its advantages and disadvantages, so it's essential to consult with a financial advisor to determine the best strategy for your specific situation. Regardless of the savings option you choose, it's essential to start saving as early as possible to maximize your savings potential and help reduce the burden of college costs in the future.
Sources:
https://www.thecollegefundingcoach.org/top-7-ways-to-financially-prepare-for-college/
https://www.thecollegefundingcoach.org/top-7-ways-to-financially-prepare-for-college/
https://www.thecollegefundingcoach.org/top-7-ways-to-financially-prepare-for-college/
https://www.thecollegefundingcoach.org/top-7-ways-to-financially-prepare-for-college/
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These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
529 plan, or "qualified tuition plan," is an investment account that provides tax benefits when the savings are used for qualified education expenses. Withdrawals from a 529 plan account can be taken at any time, for any reason. But, if the money is not used for qualified education expenses, federal income taxes may be due on any earnings withdrawn. A 10% federal penalty tax and possibly state or local tax can also be added.
