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Preparing for the Increasing Costs of Higher Education
The cost of higher Education is currently outpacing inflation. The College Board estimatescollege costs grew at a rate of 9.8 percent at four-year public colleges and universities and at an average of 5.7 percent at private four-year colleges and universities for the 2004-2005 school year. At the current rate of college inflation, parents of newborns can expect average 4-year college expenses ranging from $115,396 for (on-campus) public colleges to $221,562 for (on-campus) private colleges.
With the escalating cost of higher education, it becomes critical to plan ahead in order tosend your children to the college of their choice. There are several options available to helpfund your child’s college expenses. Three options include 529 Plans, Educational IRAs andCustodial Accounts, which can be established to help prepare families for the increasing costof higher education.
529 Plans (technically known as qualified state tuition plans) allow parents; grandparents andanyone else interested in saving for college to contribute money into a tax-deferred accountfor higher education. Regardless of income levels, a donor may contribute $11,000 per yearper beneficiary or $55,000 in a single five-year period ($110,000 for married couples) withouttriggering gift taxes. The earnings in college savings plans grow tax-deferred from Federaltaxes. When funds are withdrawn they are received Federal income tax-free if used forqualified expenses (tuition, books, room and board). If a child decides not to attend college,you can defer use of the account, change beneficiaries or withdraw the assets. If the assets arewithdrawn and not used for higher education, regular taxes and a 10 percent penalty may beimposed on the earnings.
Coverdell Education Savings Accounts (formally Educational IRAs) allow parents,grandparents and others to contribute cumulatively up to $2,000 a year for qualifiedelementary, secondary school and higher education expenses of a child. Withdrawals from aCoverdell Education Savings Accounts are Federal income tax-free if used for qualifiedexpenses such as tuition, room and board. Beneficiaries of the Coverdell can be transferred toanother family member to pay for educational expenses. If the account is not used by age 30or the funds are not used for higher education, regular income taxes and a 10 percent penaltymay be imposed on the earnings.
Custodial Accounts (UGMA/UTMA) are created for a minor usually at a mutual fundcompany or brokerage firm. This account provides a simple way to transfer property to aminor without the complications of a formal trust. When the child reaches age of majority(age 18 or 21 depending on the state), the child then has full discretion over the account. Anyearnings on the account up to $750 are tax free if the child is under age 14. Earnings from$750 to $1500 will be taxed at the child’s tax rate. Earnings over $1,500 are taxed at theparent's highest marginal tax rate (for children under 14 years of age). For children over 14,the earnings are taxed at the child’s tax rate.
Determining which approach is best can be a difficult task. A financial professional can helpyou develop a disciplined approach to saving for college costs. Together, you can determinewhich college-funding vehicle will work best for your family.
The author is a CFP, and representative of Jefferson Pilot Securities Corporation, member NASD, SIPC, Branchoffice: location of 119 W Virginia St #200 McKinney, TX 75069.He is a Partner of Legacy Planning Grouplocated at 119 W. Virginia St #200 McKinney, TX 75069
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