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The Parent Trap: College Debt

Oct. 19, 2015

Sticker shock does not begin to describe what parents are facing in the coming years. A dedicated and prudent approach to saving for college is advised and should start sooner rather than later.

According to estimates, since the mid-1980s through 2014 the average cost of a college education has outpaced inflation by roughly 7% per year. The average cost of tuition and room and board is $19,000 for public universities and $42,000 for private nonprofit schools. For high-end universities, the all-in annual cost for an education exceeds $60,000. At these rates of increase, this number will exceed $100,000 per annum within the next 5-10 years. Multiply these figures by the number of children you have, and the total price tag seems overwhelming.

There are many reasons for these staggering increases in educational expenses. But that’s not the focus of this article. You need to determine the best ways to plan and how to reduce the cost of college. College planning can be quite complex, and careful planning with a seasoned professional is advised.

The most well-known and heavily marketed way to save for college is by setting up a 529 plan for each of the beneficiaries you expect to be helping with college. 529 plans are a way to invest money for your beneficiary’s education where the investment returns are tax-deferred and withdrawals are tax-exempt, as long as they are used for qualified higher education expenses. If withdrawals from 529 plans are made for purposes other than higher education, the investment earnings will be subject to federal income tax and possibly a 10% federal tax penalty.

529 plans are particularly attractive to wealthy clients because of the high contribution limits, potential state-level deductions (varies by state) and the ability to use them as part of estate planning. Annual contributions up to $14,000 ($28,000 for married couples) can be made without gift-tax consequences, and under a special election, you can contribute up to $70,000 ($140,000 for married couples) at one time by accelerating five years’ worth of contributions. Once the account reaches $300,000 – $350,0000 (the limit varies by state), no further contributions can be made.

It’s important to note that helping out isn’t as easy as writing a check. Giving money the wrong way could throw off a client’s taxes and hurt the student’s chances for financial aid. Assets in a nonparent-funded 529 plan are not included in the financial aid calculation before the money is spent, but once that first distribution is made it counts as income to the student (student income reduces aid eligibility by 20%), which could mean a lot less aid in the subsequent year.


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