A couple of columns ago, I wrote about graduation gifts that makes financial sense, and since then I’ve been pondering more the cost of a college education and how to pay for it.
Did you know that over the last 30 years or so, college tuition and related fees have increased 1,120%? That's an annual rate that is four times faster than inflation in general as commonly measured by the consumer price index. And there appears to be no end in sight. In fact, for a child born today tuition, room and board at a 4-year private university could cost over $520,000 if you assume 6% inflation, or $240,000 at an in-state public university. (Sources: iShares Blog, "Jessie's Excellent Financial Adventure: 5 College Saving Tips," 4/18/2013; Bloomberg, "Cost of College Degree in US Soars 12 Fold," 8/15/2012)
With two children of my own left to educate, all I could say when I saw those stats was “can someone please bring me some aspirin?” I mean, wow, that hurts!
If like me you find yourself (or a family member) in that situation, what can you do?
Well, like anything else, first don’t ignore the issue, and certainly don’t just assume it will all take care of itself.
Naturally, every parent wants to believe that little Jonny or Susie is special enough, smart enough and/or athletic enough to earn a full ride somewhere, but that doesn’t always happen even for the most gifted of students.
For example, a few years back, there were three Heber Springs students who tied as Valedictorian of their class. One made a nearly perfect score on the ACT test and was awarded a prestigious scholarship at the U of A. Another scored well enough on the ACT to get a full-ride to Hendrix. However, the third, even though having the same high school GPA as the others, didn’t score as well on the ACT so only received a partial scholarship offer and the parents had to pay the difference.
This student was no doubt just as intelligent and deserving of a full scholarship as the others, but due to some unforeseen reason just didn’t quite get it done on the test that determined all this. So the unexpected can happen even to the best of plans.
The second thing is…start doing something about it. Start saving as soon as possible!
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One easy way to start is by setting up a College 529 plan, the funds from which can in the future be used to pay for education expenses at eligible U.S. 2- or 4-year colleges, graduate schools or vocational schools and even some schools abroad.
Some 529 plans can be opened for as little as $25 and can be paired with an automatic investment program that helps you save consistently. Even better, once established, anyone, including grandparents, relatives, even friends, can contribute on behalf of your beneficiary.
There are tax advantages too. The investments grow tax-free and the income is never taxed so long as the distributions are used for eligible education expenses of the beneficiary.
If you use the Arkansas College Savings Plan, a state tax deduction is allowed for the contributions up to $5,000 ($10,000 for a married couple).
Plus, contributions can be made without gift tax consequences up to the annual gift exclusion amount, currently $14,000 for 2013 ($28,000 for a married couple).
As John Barnes, Sr. VP of Raymond James in Little Rock told me, “I advise my clients to set up a College 529 Plan as soon as possible. Grandparents like to do this. My wife and I set up a College Savings 529 plan for each of our grandchildren. Every month we contribute $50 to each account. Parents and other grandparents have contributed to these accounts. It is not the amount that is important; it is the discipline of contributing a dollar amount every month. Over time that discipline and the power of compounding will grow.”
Depending on when you start, you may not be able to contribute enough so that the plan will cover the full cost of college for your child. However, the value of the account certainly lowers the amount needed from other sources, such as scholarships or student loans.
Reducing the need to borrow money for college is alone worth every effort you can make.
So the question now is; what are you waiting for?
Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants