How to save and pay for college
Barry Glassman, Glassman Wealth Services
WTOP Financial Contributor
WASHINGTON -- Despite escalating costs and recent debates as to whether obtaining a four-year degree is worth it, having a college education is still the best route to financial success.
The Economic Policy Institute found that those with a four-year college degree made 98 percent more per hour on average in 2013 than those without a degree.
As college tuition and education-related expenses continue to escalate, it's more important than ever to calculate how much you need to save and start saving early. And enrolling in a college savings program can help you meet your financial goals.
How much does college cost?
Before you can know how much to save for college, I recommend you do some homework to understand what type of college you want to fund: public, private or Ivy League.
Many people are not aware of how expensive college has become, nor are they aware of the cost disparity between colleges. This chart below illustrates the hypothetical -- and astonishing -- cost of four years of college (including tuition, room and board) for a child born in 2014.
|Cost of college in 18 years|
|Public: In-State||Public: Out-of-State||Private||Ivy League|
|Today's Annual Cost||$17,860||$30,911||$39,518||$60,000|
|Future Annual Cost||$50,978||$88,230||$112,798||$171,260|
|Future Total Cost||$236,392||$409,133||$523,054||$794,150|
For those who want to narrow their focus even further, there are great resources that can help determine exact tuition rates for a specific state or a particular school and project the costs for when the student will enroll. Some of the best 529 college savings plans (more on this later) have the most user-friendly calculators available, including the T. Rowe Price college investment calculator and the American Funds college cost calculator.
How much should you save for college?
For many, saving enough to cover the costs of college for one child, let alone several, is simply out of reach. The best advice is to start early and try to save at least some amount each month.
For those who have the means to fund most, if not all, college expenses, a good rule of thumb is to use a 529 college savings plan to save 75 percent of the expected cost to avoid over-funding. The 25 percent coverage gap could come from current cash flow, scholarships, student loans or other means.
What are the best ways to save for college?
One of the best ways to save for college is with a 529 college savings plans, based on the benefits they offer. They were created to incentivize college savings over time, and there's a wide array of plans available since most states and some private institutions sponsor their own.
Basically, there are two types of 529 savings plans: pre-paid tuition plans and savings plans. While there are distinct differences between the two types of plans, they work similarly and have three key benefits:
- Contributions grow tax-free if used for qualified education expenses.
- You may be able to write off contributions on your state tax return.
- Dollars in a 529 plan are outside of the grantor's estate, and you may continue to have control over whom the beneficiary is and how the dollars are invested.
Pre-Paid Tuition Plans
Pre-paid tuition plans let you to lock-in today's tuition rates. Semesters or years of tuition can be purchased and later redeemed for the student at participating colleges. Make sure to carefully read through the plan, as the details are very specific to each plan.
While the money invested in these plans can only be used for tuition and fees, it's an attractive option to control future college costs.
The down-side? If the student elects to attend a college that does not participate in the pre-paid plan you chose, the credits you purchased may have a lower value than expected, or you may receive a refund of your money.
These plans are best for those who are willing to accept more restricted geographical areas or college choices for the opportunity to lock-in today's prices for tuition and fees.
Savings plans work like an investment account, where dollars are deposited and invested. The value of the account is subject to the markets and the growth (or decline) of the investments that were selected.
There's greater flexibility with savings plans, since tax-free withdrawals can be used for tuition and fees plus other qualified expenses, such as room, board, books and supplies. Also, the student can use the dollars at any college, university or secondary education institution.
Contributions are limited to the annual IRS gift limit (currently $14,000 per person per beneficiary in 2014), but a special rule allows a large lump sum deposit that can be counted as a five-year gift if you want to make the contribution up front.
Savings plans are best for those who are comfortable with investment risk and want the flexibility to use the dollars at any college or secondary institution for any qualified education expense.
There's a lot to consider, but this guide helps guide clients to building a better college savings plan.
Top College Savings Plans
We are often asked, "What are the top college savings plans?" Many independent companies rank plans based on fees and performance. The plans below are consistently rated the best in the country:
The College Savings Plan Network has a good website that lets users compare 529 plans by state. Savingforcollege.com is a comprehensive site where users can learn more about 529 plans, compare plans and calculate college costs.
Keep in mind that helping to pay for college is a direct investment in your child or grandchild's future -- one that will continue to pay dividends over your lifetime and theirs.
Editor's Note: Barry Glassman, CFP®, founder and president of Glassman Wealth Services in McLean, Va., is a nationally recognized leader in investment and wealth management. His fee-only firm offers successful professionals, executives and business owners financial guidance and resources to effectively manage their family's wealth. Follow Barry on Twitter at @BarryGlassman.
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