Invest time in planning for higher education
By Mariette “Pete” Luchini, CPA, Cordell, Neher & Company, Wenatchee, Certified Public Accountant
Today, a post-secondary education is a minimum requirement for most high-skilled occupations and many parents expect their children to continue schooling after age 18. Unfortunately, the nationwide average cost of a college education continues to rise more quickly than the rate of inflation. Costs for trade and technical schools are also on the rise.
Annual in-state tuition for a full-time student at Wenatchee Valley College is $3,881, with the overall cost, including books, transportation, miscellany, and room and board estimated at $17,966. Washington State University tuition is $9,884 with total costs estimated at $22,854, and the University of Washington tuition is $11,691 with overall costs at $25,948. Private schools like Gonzaga and Whitworth have tuition costs in excess of $35,000 without financial aid.
The challenge of financing these costs can be overwhelming. A growing list of funding tools is available that can help with the cost of attending college. While multiple tools can be used to provide sufficient funding for an entire education, not all tools can be used in conjunction. Therefore, careful, early planning is the key.
Incom-producing assets are generally the aim for funding. Your time horizon will most likely dictate which types of investments you choose because risk tolerance for an investment when a child will attend college in ten years is much greater than when the child will attend college in three years.
Ways to save now include holding certain assets for a minor under the Uniform Gifts to Minors Act. Custodians may accumulate income until the minor reaches age 21, at which time the property must be distributed. The minor reports any taxable earnings, whether distributed or not, but the minor is usually in a lower tax bracket than parents.
There are many long-term savings tools to help save, one of them being the Education IRA. Currently, the total contribution for any one beneficiary is limited to $2,000 per year. If your adjusted gross income is between $95,000 -$110,000 for single persons, or $190,000 to $220,000 for married persons, the contribution limit will be reduced. The beneficiary must be under age 18 to receive contributions, and must make all withdrawals by age 30.
Another excellent long-term savings approach is contributing to a 529 plan. A 529 plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for or prepay future college costs. Your choice of school generally is not affected by the state your 529 savings plan is from.
While your child is attending college, the American Opportunity Tax Credit and the Lifetime Learning Credit may reduce the amount of tax you owe as long as income levels do not exceed a certain threshold.
When your child is applying to colleges, he or she may be fortunate enough to receive scholarship funds or grants. Scholarships will affect the manner in which you use the money you have accumulated over the years to pay for college.
Student loan debt is a whole other conversation, but this is a common alternative when financing a child’s education. Before your child enters college (or other qualifying postsecondary educational institution), be sure to complete the federal student aid form (FAFSA.) Grants and subsidized loans are available to many. The federal aid program will consider the parents’ and child’s incomes and assets when determining eligibility.
Remember, planning requires a disciplined approach that is consistent with your overall goals and entails an ongoing process of assessment and adjustment to meet these goals.
There are many alternatives to funding your child’s education. The best approach is to begin planning as early as possible.
Use These Tools When Funding a College Education
- Taxable Savings
- Uniform Gift to Minors Act
- State-Sponsored Tuition Savings Plans
- Prepaid Tuition Plans
- Education IRAs
- Roth IRAs
- Personal Loans, Government Loans
- Pell Grants
- Hope Credit or Lifetime Learning Credit
- Deductions for Student Loan Interest
- Institutional or Other Scholarships