College: An Affordable Luxury?
by Stacy Francis, CFP®, CDFA
Thousands of young people will enter America’s colleges and universities this fall. Will your child be able to afford to go to school? With the skyrocketing cost of college many parents consider college tuition a luxury they cannot afford.
Whether the experience involves a community college or major university, living at home or at school, it means spending a lot of money. This is money well spent though and can be manageable with the proper preparation and savings vehicles. The key to keeping college affordable for people of all economic and social backgrounds is starting to save early and taking advantage of the numerous government subsidies, grants and savings plans for higher education.
According to The College Board, the average college graduate makes twice as much as someone without a college degree. An education is one of the best opportunities you can provide for your children but should not be the parent’s sole responsibility. Protecting your child’s financial future begins long before they go off to college. Educate them early about saving for college, and involve the kids from a young age. Even young kids can stash a portion of their lemonade stand profits and babysitting money in a savings account.
Learning to handle money takes training and practice. If you don’t teach your kids these essential life skills, they may just learn them the hard way. The average student leaves college with more than $2,700 in credit card debt. That’s separate from any college loans they may have.
Sending kids off to college prepared to handle the financial responsibility, and making them aware of the gravity of the investment the entire family is making in their future, is a huge step toward their own independence. This will be one of the most important lessons they can learn.
There are a variety of options for parents or others who are saving to put a child through college. The following are popular vehicles for saving for college.
529 Plans – These programs, sometimes referred to as qualified tuition plans, have become extremely useful in recent years, allowing for money to grow tax deferred and be withdrawn tax-free if used for education expenses. There is no gift tax on contributions invested in this plan as long as you stay within limits (up to $14,000 per year per individual in 2014). Some plans allow donors to accelerate five years’ worth of gifting up to $70,000 without incurring gift tax. Family member definitions have been expanded to allow for transfer of benefits not only to other siblings, but also to first cousins of the designated beneficiaries if the original beneficiary does not intend to use the funds for school.
Pre-Paid State Tuition Plans – Buy tomorrow’s tuition at today’s prices. At least that’s the theory behind these state-sponsored 529 Plans, which allow you to purchase a single year of average public tuition at current tuition rates now, in return for a year’s average tuition when your child enrolls in college at a qualifying institution in the future. Pre-paid plans make the most sense financially speaking when the money isn’t needed for at least four to five years.
In addition, new options are being created all the time by both private institutions and independent organizations for the purpose of funding an education at a private college or university. If private school is a goal for your family, be sure to investigate your options with regard to special funding programs.
Stacy Francis is president and CEO of Francis Financial, Inc., a fee-only wealth management practice dedicated to investment advisory services for women, couples and those experiencing divorce. She is also the founder of Savvy Ladies®, a nonprofit organization that educates and empowers women to take control of their finances.