The increasing costs of higher education have made education planning an important
aspect of personal financial planning. However, because the actual expenditure will
not be incurred for many years, it is often given a low current priority. Also, some
parents are counting on scholarships to cover the cost of their children's education.
Unfortunately, this tendency to postpone the issue may eliminate several education
planning strategies that must be implemented early to be effective.
Escalating costs. Although the increase in the cost of attending
college has slowed down to its lowest escalation rate in years, the College Board
reports that 2014-2015 tuition and fees continue to rise at a rate faster than the
consumer price index (www.collegeboard.com). All told, the cost of a college
education is staggering, and this is unlikely to change.
According to the College Board report, for one year of full-time study, private
four-year colleges rose 3.7% (to an average cost of $31,231) from 2013-2014 for
tuition and fees alone. Average total charges with room and board are $42,419. Public
four-year colleges are up 2.9% (to an average of $9,139) from last year for in-state
tuition and fees - room and board adds on another $9,804. Public four-year colleges
are up 3.3% (to an average of $22,958) from last year for out-of-state tuition and
fees. Average total charges with room and board are $32,762. Even tuition and fees at
public two-year schools are up 3.3% (to an average of $3,347).
The report indicates that the subsidies provided to full-time undergraduates at public
universities through the combination of grant aid and federal tax benefits averaged
$6,110 in 2014-2015 -far below the actual cost of attending.
Six methods to pay for college. In general, the six basic methods of
paying for a child's higher education include a child working his or her way through
school; obtaining financial aid (scholarships and federal loans); paying college
expenses out of the parents' current income or assets; using education funds
accumulated over time; obtaining private loans; and grandparents (or others) paying
The first method (child pays) can work, and many successful persons have obtained a
good education while working to pay their way. But this often limits the student's
choice of schools and can adversely affect grades. Planning to rely on financial aid
(the second method) is risky, and the family may not qualify for enough. The third
method (parents paying out of current income or assets) works for some, but many
parents will not know if their current income and/or assets will be sufficient until
it is too late. In addition, this method is not as tax-efficient as some strategies
used to accumulate separate education funds (the fourth method). However, these
strategies are not without risks. Poor investment choices could prove costly. The
fifth method (private loans) can result in a serious debt burden. Obviously, the
sixth method is ideal, but it is not available to many.
How grandparents can help. Grandparents, as well as other taxpayers,
have a unique opportunity for gifting to Section 529 college savings plans by
contributing up to $70,000 at one time, which currently represents five years of
gifts at $14,000 per year. ($14,000 is the annual gift tax exclusion amount for
2015.) A married couple who elects gift-splitting can contribute up to double that
amount ($140,000 in 2015) to a beneficiary's 529 plan account(s) with no adverse
federal gift tax consequences. As an added feature, money in a 529 plan owned by a
grandparent is not assessed by the federal financial aid formula when qualifying for
Conclusion. The key to effective education planning is to start
planning and saving early to create future options. In addition, the use of
tax-sheltered investment and savings vehicles like a 529 plan can help ensure
adequate funds are available when a child enters college.
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opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015