COLLEGE PLANNING IN 2020
Higher education has been making the headlines as schools decide how they are going to operate in the year ahead. While there are still many unknowns for students this fall, it is safe to assume that the long-term value of a college education is still an attractive path toward a fulfilling career. Paying for college is a high-priority financial planning topic for many families. A college education is widely recognized as a terrific investment toward a bright future, especially if the costs are manageable and well-planned for.
THE COST OF COLLEGE: TOTAL COST IS ONLY THE STICKER PRICE
One of the challenges in planning for college is that the actual cost remains unknown until very late in the planning process, often when a prospective college student is only a year away from incurring the cost. The range of potential costs is very wide. Consider some of the following information provided by the National Center for Education Statistics regarding costs for first-time, full-time undergraduate students for academic year 2018-2019:
- The average total cost to attend a 4-year private nonprofit institution on campus was $51,900.
- The average total cost to attend a 4-year public institution on campus was $24,900.
- The average total cost to attend a 2-year public institution on campus was $15,400.
A quick glance at some local schools in Maine provides some examples. Bates College is currently advertising their 2020-2021 annual total costs at $75,680. The University of Maine had a total cost of $25,604 for the 2019-2020 academic year for Maine residents that live on campus. Maine’s Community Colleges system is advertising 2020-2021 total costs at a range of $10,480 – $14,880 for Maine residents that live on campus.
Families should keep in mind that the total cost is often much higher than the price that they will actually pay.
THE COST OF COLLEGE: NET PRICE IS WHAT YOU PAY
Many students do not actually pay the total costs listed above. They pay the net cost, which is the total cost less grants, scholarships, and work programs. Bates College states that their average financial aid award is $51,099, reducing their original sticker price of $75,680 all the way down to $24,581. Public institutions offer grants and scholarships as well. Maine Community Colleges reports that 76% of their students receive some form of aid.
It can be helpful to spend some time using the ‘net price calculator’ located on many schools’ websites. After a user enters some basic information, they may have a much better idea of what their true cost to attend school will look like. Many students that have unremarkable academic or athletic profiles and have parents that have some means of paying toward a college education are pleasantly surprised to find that the cost of college may be much less than published rates.
It can also be helpful to discuss the net cost of a prospective school with a representative from the school’s financial aid office. This information will help families have a clearer comparison of what they might reasonably expect to pay for their target schools.
Inflation rates for education vary widely by institution and time period. A conservative assumption is that the cost of education will increase at a higher rate than the general inflation rate. Many financial planners assume inflation rates of 4% – 6% per year.
DEVELOPING A SAVINGS GOAL
As you can see, the range of potential costs can make planning for college very difficult. A two-year degree at a community college may cost a student less than $20,000 in total, while a four-year degree from a private college could cost over $300,000. A college savings plan should be based on your available resources and values, combined with some reasonable assumptions of what the future costs may be. A savings plan also needs to have some flexibility and the support of backup plans, such as borrowing, in the event that there are some surprises in the final years before the student attends school.
A clearly defined savings goal will make the savings process easier. Some clearly defined goals may sound like this:
- My plan is to save and fully fund 100% of the cost of any school that my child attends.
- My plan is to save 50% of the cost of an in-state public university. We will pay another 25% out of cash flow and the student will be responsible for the remaining 25%.
- My plan is to save $100 each month into a college savings plan. We will use that amount toward college and the student will be responsible for the remainder.
There are no right or wrong answers, but it helps to form a plan and begin working on it as early as possible. The plan can then be adjusted over time as more information becomes available about the future spending goal.
EDUCATION SAVINGS PLANS
College savings plans are often known as 529 savings plans, in reference to the Internal Revenue Code section that authorizes the plans. A handful of states still offer prepaid tuition plans, which have become increasingly less popular in recent years, but this article will not explore them in any depth. College savings plans were introduced in the mid-90s and have become a common tool for families interested in saving for college. The plan is generally owned and controlled by the participant, with the potential growth on the investments exempt from taxation if the funds are used for qualified education expenses. A 529 savings plan can be opened by a parent, grandparent, or family friend. There are also liberal provisions to change the beneficiary of the account if future needs dictate that a change is required.
Individual states sponsor one or more savings plans, which can vary in expenses, investment options, and local tax treatment. For example, Maine offers the NextGen college savings plan in two formats. Participants have the flexibility to alter their contribution amounts over time.
OTHER SAVINGS VEHICLES
Roth IRA accounts can also serve as a tool to help families save toward college, assuming that Roth accounts are not already being used for retirement planning purposes. Annual contribution limits are much lower than 529 savings plans, capped at $6,000 per year for those under age 50, and the ability to contribute is governed by income levels. Like 529 savings plans, contributions are not immediately tax deductible, but the growth of the account is sheltered from taxation and penalty if the funds are used toward qualified higher education expenses.
Coverdell Education Savings Accounts allow up $2,000 per year in contributions.
There are currently two major tax credits that can help families pay for college. The American Opportunity Tax Credit is worth up to $2,500 of the cost of tuition, certain fees, and required course materials. The credit applies to 100% of qualified expenses up to $2,000, then 25% of the next $2,000 in qualified expenses. Students must be enrolled at least half time in an undergraduate degree or certificate program. The credit can be phased out for single filers with modified adjusted gross income over $90,000, or $180,000 for filers that are married filing a joint return. The credit is partially (40%) refundable. Details can be reviewed on the IRS website.
The Lifetime Learning Credit is a non-refundable credit that applies to both undergraduate and graduate education. It can also apply to certain professional development and adult education related expenses. The credit is capped at $2,000, or 20% of the first $10,000 in expenses toward tuition and other qualified expenses. The credit is phased out for single filers with modified adjusted gross income over $68,000 and $136,000 for filers that are married filing a joint return.
The credits cannot be claimed simultaneously for the same student in a given year.
CONSIDERATION FOR GRANDPARENTS
Grandparents can open and own a college savings plan on behalf of a grandchild. These assets are often useful in paying for the final year of school for the student, given that a 529 owned by a grandparent is not reported on the FAFSA form as an asset, but withdrawals from that account are reported as income to the student. For that reason, it can be advantageous to use the funds owned by a grandparent in the final year of school, assuming that another FAFSA form will not be filed.
CONSIDERATIONS FOR RESIDENTS OF MAINE
The Maine NextGen 529 college savings plan offers attractive grant opportunities for participants or beneficiaries that are Maine residents. The full terms of the grants are detailed on their website. Perhaps the most powerful grant is the NextStep Matching Grant, which provides a 30% match on contributions made to an account, up to $300 per year. Other grants include the Automated Funding Grant, which allows for a $100 grant to be made upon completing six consecutive automated contributions to an account. Most Maine newborns will also be eligible for the Harold Alfond College Challenge Grant of $500.
Maine does not currently offer a state income tax deduction for contributing funds to a 529 savings plan.
OTHER WAYS TO PAY FOR SCHOOL
Families should explore all available scholarship and grant opportunities. They should also become familiar with Federal student loan programs and private loan programs, in the event that they need to borrow money to fund the cost of college.
Home equity loans can also be explored.
DISCUSS WITH YOUR TAX AND LEGAL PROFESSIONAL
This information is intended to provide you with a high-level overview of the current landscape of planning for higher education costs. It is not intended to be relied upon as individual advice, nor is it possible to outline all the details in this brief article. Please discuss these matters with your own tax and legal advisors before taking any action.