Start Saving Early

The cost of higher education is increasing year after year with increases running well ahead of inflation.  At some prestigious private colleges and universities, the cost of only one year, including room and board, has reached in excess of $70,000. That means the final cost of a bachelor’s degree can be $280,000 or more.

With many professions requiring graduate degrees, and a medical education easily cost much more, it quickly becomes apparent that very few families may be able to pay these bills out of their current income. Even with only one child, the costs can be prohibitive; for families with three or four children, college and graduate school costs could reach or even exceed $1,000,000.  So, how can your family build an adequate fund for college? The first step is for your family to look ahead and prepare as early as possible to meet the financial challenge.

There are a number of ways you can do this.  The method that is best will depend on the age of your child, your family resources, and other considerations, such as the preference for a public or private college, and your eligibility for financial aid.  Taxes are also an important concern.  If money can be invested to earn interest, dividends, or other income that is not taxed until needed for college expenses, the college fund will accumulate much faster than if taxes were to take a bite out of the income.  When creating a strategy, your family should figure on tuition, as well as room and board, increasing by an annual rate of at least 5%.  For example, at that rate of inflation, the $10,000 tuition at a public college will rise to $14,775 for a student entering college in the year 2026.  

Before the Tax Reform Act of 1986, one of the best methods of saving for college education costs was to set up a custodial account in your child’s name under your state’s Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). Under these laws, interest and dividend income were taxable to your child; however, tax reform drastically changed that benefit.  These vehicles are assessed at 20% on the FAFSA as opposed to assets in the parents' names which are assessed at only 5.64%.   

Today, various popular funding vehicles range from money market funds to mutual funds and other various investment products. If you have more than ten years to save, an appropriate step could be to purchase cash value life insurance. You can save money in a tax-advantaged way with tax-deferred cash values that grow within the policy.  In addition, using life insurance to fund educational expenses offers guaranteed completion—meaning, if the parent (the insured) should die at any time before the child reaches college age, the death benefit will provide tax-free funds to help pay for the child’s education.  One disadvantage of this strategy is that funds used to pay for college may be counted as income to the child which is assessed at 50% on the FAFSA.  

By any standard, accumulating the required amount to pay for college tuition is often a difficult task. It is probably wise to discuss your options with a Financial Planner or Accountant who specializes in College Planning.  The main point to remember is that you should start to prepare as early as possible.  

Patrick Logue