Investing in a College Degree


Remember the popular childhood board game, LIFE®? Within the first ten squares of moving your miniature car you must decide whether or not you will attend college, take a loan for $120,000, and ultimately strive for a higher salary card selection later.

web-axstj-graduationdsc_0132-stj3-1013-2460.jpgAccording to the U.S. Census Bureau statistics, those who earn a bachelor’s degree today are in fact more likely to earn a higher income and begin a career that offers many growth opportunities.

When faced with financing a college education, families are often told that they either earn too much income or own too many assets to qualify for financial aid. Yet the cost of a college education continues to escalate.

According to the College Board, a four-year private college education has increased 5.9% from last year whereas a four-year public education has increased 6.3%. Estimating the actual cost of your child or grandchild’s education is difficult; requiring disciplined savings and financial planning to make your child’s education affordable.

For many parents and grandparents, the 529 college savings plan is a significant tool in preparing for the increasing cost of higher education. A 529 plan is a tax-advantaged savings plan sponsored by the state to encourage saving for future college costs. Anyone can contribute to the account, as often and as much as desired, and contributions grow tax-deferred.

The money contributed can only be withdrawn tax-free if used for higher education at a post-secondary school of your choice; public or private, undergraduate or graduate. Withdrawals from the 529 plan can only be used on qualified expenses such as tuition, fees, room and board. Money withdrawn from a 529 plan for expenses that are not “qualified” are subject to a 10% federal tax penalty on the earnings as well as applicable income tax penalties.

Another advantage of the 529 plan is the ability to transfer funds. If the beneficiary of a 529 plan does not need the plan funds for higher education, or has completed college, then the plan beneficiary may be changed to another qualifying family member in order to pass along any remaining portion of the 529 account. Siblings or cousins are not permitted to share an account.

On average, a family in a higher tax bracket often faces a higher cost for college education. The 529 plan can offer tax benefits since (1) contributors receive a state income tax deduction for all amounts contributed, (2) the funds are tax-free if used for college expenses, and (3) the 529 plan can be invested in the stock market, which historically can generate stronger returns over time.

The 529 plan also provides benefits to those who want to distribute assets to family members, gifting, in order to reduce the size of their estate and lower estate tax liability. An individual is permitted to gift up to $12,000 in cash or other property each calendar year to as many individuals as the taxpayer may desire without any gift tax.

When contributing to a 529 plan, an individual may contribute up to $60,000 per beneficiary at one time. Thus, the plan allows contributors to shift wealth to children or grandchildren without paying gift or estate taxes and maintain control as to how the assets will be used. Your tax advisor should be consulted for gift tax treatment.

Planning for the rising costs of higher education does not have to be an overwhelming process. Your CERTIFIED FINANCIAL PLANNERTM professional can help you determine if the 529 college savings plan, or another investment vehicle, is the right investment vehicle for your child or grandchild based on your unique financial situation.