Saving for College

Empty Your Nest, Not Your Savings

A college education may be the key to a rewarding career for your children and Grandkids, but with the rising cost of college, how can it fit in your budget?

Finding a Way 

College costs have skyrocketed, but understanding the different ways to fund a college education may help you. 

Price Check

What will college cost when your kids are ready to leave the nest? The average annual price of a four-year private college today is $48,510 (includes tuition, fees, room and board); while the average annual price of a four-year public college, for in-state students, is $21,370. To estimate your potential costs, you can multiply that by four years – and by each child. In addition, tuition increases have averaged 3.2% for private and 2.1% for public college over the last 10 years. At that rate, in 2030, about the time a five-year-old child today will be entering college, the total four-year cost will be $275,768 for a private college and $132,906 for a public college! To accumulate enough money to foot such a bill, you may decide to begin setting aside money immediately – right after your child is born. As the following chart shows, to net $50,000 towards college costs, you could consider saving $100 each month beginning at birth. The longer you wait, the more you would have to put away each month to reach that same $50,000.

If savings begins when the child is:
Born Age 4 Age 8 Age 12 Age 16
The amount you need to save monthly to have $50,000 at age 18* $131 $193 $308 $582 $1,969

*Assumes 6% compound annual interest. Hypothetical example, not guaranteed, and not intended to represent the performance of any specific product.

Save and Study Plans 

The government has established a number of programs and tax laws to you save for your child’s college. A few popular options include:

529 Plans ScholarShare is a California state-sponsored, tax-advantaged, 529 college savings plan. It’s available to any taxpayer including parents, grandparents, other family members, and friends.

ScholarShare earnings grow free from federal tax. Withdrawals for qualified higher education expenses are tax-free at both the federal and state level. Withdrawals for up to $10,000 of tuition expenses at a public, private or religious elementary, middle, or high school per student, per year across all 529 plans are also tax-free at the federal level. The earnings portion of any withdrawal used to pay for tuition expenses at a public, private or religious elementary, middle, or high school are taxable at the state level for California taxpayers. 

If using the funds for qualified higher education expenses, you can use the funds for a lot more than just tuition — including required fees, certain room and board costs, books, supplies, as well as computers and related technology costs such as internet access fees and printers. Additional equipment required for attendance may also qualify. Funds can be used at most accredited colleges and universities in the United States — even certain colleges abroad.1

If the account’s beneficiary (your child) decides not to attend college, the money can be put towards another family member’s education; otherwise, it’s taxed at your normal rate. Remember, withdrawals for non-qualified educational expenses are subject to a 10% federal tax penalty and are taxed as ordinary income. 

Coverdell Education Savings Account – This account provides tax-deferred earnings and income tax-free withdrawals (for qualified expenses), but participants must meet specific income requirements and you can only contribute up to $2,000 annually. If your income exceeds the maximum, however, grandparents and other relatives can set up a Coverdell in your child’s name. The fund is transferable to another child if a first child does not go to college; however, taxes and penalties apply if it’s not used for college.

Uniform Gifts (or Transfers) to Minors Act – UGMAs/UTMAs allow you to transfer up to $14,000 a year to an account held in a child’s name; although you (or the donor) are the custodian of the account. The money is taxed at the child’s rate and is no longer part of the adult’s taxable holding; it may be able to reduce your income tax bill. The gift must be sizeable for any real tax benefit. Once given, it can’t be taken back; and your child can use the money for anything. 

Tax Credits – Families that qualify can earn income tax deductions (tax credits) for college costs. The Hope Scholarship Credit provides up to $2,500 per year, per student during the first four years of college; while the Lifetime Learning Tax Credit provides up to $2,000 per tax return and there is no limit on the number of years you can claim the credit. To qualify, families must meet certain income requirements: $52,000 for single head-of-household and under $104,000 for joint returns.

Going to the Source

Most schools offer some type of financial support for students who qualify, such as:

  • Financial aid – Factors considered include parents’ annual income, assets, number of dependents, other family members in college, and unusual circumstances.

  • Loans – Students must repay the loan through a payment schedule for many years after graduation (which could become a financial burden and affect credit rating).

  • Athletic and academic scholarships – Awarded to students based on a variety of achievements and qualifications.

Other sources of aid from schools include work-study programs, merit awards for academic achievement, activities awards for involvement in various student activities, and assistance for disabled students. You can contact each school for its specific programs and policies.

Using Your Plan Account to Pay

You also have the option of lending yourself the money from your Plan account. The Plan loan feature allows you to borrow from your account balance and pay back the loan, plus interest, through automatic payments from your bi-weekly paycheck.  You may borrow up to 50% of your account balance. The minimum loan amount is $1,000, and the maximum is $50,000. Loan funds can be disbursed via check or direct deposit to your checking or savings account.

Planning Your Kids’ Future — and Yours

Saving for college doesn’t have to come at the risk of your own financial future.A bit of planning can help you ensure a bright future for your kids’ without placing yourself or them in debt.

This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. We recommend that you consult an independent legal or financial advisor for specific advice about your situation. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.

Daniel Powell