Dollars and Diplomas
At graduation time, parents’ biggest test may be financial
It is a heady time of year for families of newly graduated high schoolers. As the young grads prepare to take their next big steps, parents who have prepared well for the moment can look ahead and share in their excitement.
But for parents of college-bound kids who, for whatever reason, are not financially prepared for this turning point, it can be an anxious time.
According to the National Center for Education Statistics the cost of a college education at public, four-year institutions in the United States has shot up 40 percent during the past decade. A public university degree costs about $67,000 on average, while four years at a private institution will chew through about $135,000.
Kids from high-net-worth families and those whose academic records sparkle with scholarship promise may not find those costs frightening. But a great many others could be headed for a financial struggle.
Most financial advisers strike a common chord when it comes to funding a child’s higher education: Start planning when the child is still in diapers. The earlier that parents can begin stashing money away for college, the smaller the financial hurdles will be 15 to 18 years down the road.
The good news for many students is, both federal and state governments have taken steps to help families accumulate the resources they’ll need when college time arrives. One of the most important tools is the 529 Plan.
Named after a section of the Internal Revenue Code, the 529 is an education savings plan that works a little like an IRA. Once parents set it up, they can make periodic contributions to it and have their investments grow on a tax-deferred basis.
When they take money out of the plan – as long as the distributions are used to pay for college – they’ll owe no federal tax on whatever income and appreciation the investment has generated.
Most states now offer some variation on the basic 529, and Louisiana offers an outstanding 529 called START.
People who invest in a START Plan can receive a state income tax deduction of up to $2,400 a year for their contributions to the plan. The law allows a husband and wife both to invest in the plan for a deduction as high as $4,800 a year.
Louisiana sweetens the deal by kicking in matching funds ranging from 2 percent to 14 percent of donors’ contributions, depending on their income level.
“Louisiana’s 529 is a great plan, and not enough people are taking advantage of it,” says Jude Boudreaux, a certified financial planner.
He warns, though, that some parents are unlikely to hear about the SMART Plan from their financial advisers because other types of 529 plans carry bigger rewards for salespeople.
Some brokers are pushing 529 plans that cost the investor a commission, carry higher management expenses and don’t provide the state income tax benefits available from the SMART Plan, he says.
Because of their higher costs, those vehicles would have to perform substantially better than the SMART Plan to justify choosing one of them, says Boudreaux, who provides financial advice on a fee-only basis.
Investments in the SMART Plan are managed by low-cost mutual fund provider Vanguard Investment Group, he notes, and investors can set up the plan on their own, without going through a financial adviser.
While Boudreaux sees college saving as a vital part of a family’s overall financial planning, he says that families should keep their critical financial needs in perspective. If parents are torn between putting money into a retirement plan or a college savings plan, for instance, he suggests taking the long-term view.
“I like to tell people, ‘You can get a loan for college, you can’t get a loan for retirement,’” he says. “Take care of your retirement needs first.”
One investment that could serve either purpose is a Roth IRA. For people who are eligible to take advantage of it, the Roth IRA provides tax-deferral on the investment’s growth, and if the money is used to pay college costs, distributions from the vehicle come out tax-free.
“It gives you the flexibility to use the money for college or retirement,” Boudreaux says.
While the soaring cost of college strikes fear in many parents, some advisers suggest pausing for a breath of reality.
“Save what you can, but expect college to be more affordable for newborns than it is for today’s graduates,” MarketWatch.com financial writer Chuck Jaffe wrote in a recent column.
Jaffe said tuition costs have nearly reached a breaking point, meaning they aren’t likely to continue rising as fast as in recent years. “As with any commodity – and that’s what an education is, no matter how much academics scoff at the idea,” costs will start to come down, he said.
One force that’s likely to drive down the price of a traditional university education is the Internet. The proliferation of online learning already has forced major institutions to offer Web-based courses.
“You can take online classes at Harvard (University) for a couple thousand dollars per credit hour,” Boudreaux points out.
He predicts that the “democratizing” effect the Internet has had on many other products and services is going to have a similar impact on higher education.
Forecasts of declining college costs aside, it’s still a good idea for parents to begin planning early if they want to help their kids get the best possible start on their adult lives. A good place to start is the website SavingForCollege.com, which offers tools to estimate the future cost of a particular college and a calculator that can help determine the amount of monthly savings needed to arrive at the goal.