Every year, parents paying for their children’s college education ask, “Is this really worth the money?” And every year, the answer becomes less of a full-throated “Yes! Absolutely! A college education is worth every penny, and then some!” By the end of the last academic year, the answer was more likely to be “Yeah. Maybe.”
This year, it is an open question. Students are attending virtual classes while their parents are paying actual money. And even if the remote coursework is on a par with in-person instruction, part of the value of a college education is the on-campus experience. Think back: Do you remember more than flashes from your college classrooms? Compare that to what you remember from the dorms.
College is not what it was even a year ago. After all, you can’t have a Homecoming weekend if the kids never actually leave home.
It’s up to you whether you still think college is worth it, although the data still supports that premise. So, assuming you do, it’s best to start planning for how you are going to finance your kids’ education about as soon as you can.
529 + 401(k) = x
The most common college savings option is the 529 plan, a state-sponsored, tax-advantaged saving vehicle designed to encourage savings specifically for education. But there are two different kinds of college savings plans:
- Prepaid tuition plans, which pre-purchase credits at participating colleges and universities, locked in at today’s prices; and
- Education savings plans, which are an investment account to save for the student’s future tuition, mandatory fees, and room and board.
The first one usually only works at public colleges and universities within the state where you now live. Someone living in Philadelphia, for example, could pay Class of 2021 rates for Penn State tuition but not graduate or even attend until 2040 or later. Also, while these prepaid plans cover tuition, they probably won’t touch room-and-board expenses.
The second option is far more widely used. You can park up to $15,000 per year per child in these accounts, then invest the account as you see fit in a portfolio of mutual funds.
These aren’t the only two options for college savings, though. You can also pass money on to your children during your lifetime via Uniform Gift to Minors Act accounts, which gives the kids access to financial assets you set aside for them on their 18th birthdays. If you have more than $15,000 per year to hand down to them and can trust them to spend the money on educational expenses, then a UGMA could be an option.
You can take money out of your qualified retirement accounts – 401(k)s, IRAs, and the like – for “immediate and heavy financial need.” This includes college expenses. On the one hand, this is an option for children who might not be college-bound; if they end up not continuing their education, you still have these funds in your retirement portfolio. On the other hand, if you do use retirement funds to pay for college, the distribution becomes taxable income even though you won’t have to pay an early withdrawal penalty.
The typical college graduate who took out loans ends up owing $40,000, on average, as a result. That’s debt service that’s not going towards buying a home, investing for retirement, or anything else that could build wealth.
Notoriously, there’s very little wiggle room to get out of student debt. Even a declaration of bankruptcy does not make this burden go away.
However, there is one way out: the U.S. Department of Education’s Public Service Loan Forgiveness program. Some or all of your children’s student debt could be wiped clean if they go into government or not-for-profit work. After making 120 qualifying monthly payments, the remaining debt will be forgiven.
Additional ways to manage college costs
In addition to 529’s and taking college loans, here are some additional ideas when it comes to managing high college costs:
- Scholarships from school-related or third-party organizations; these need to be applied individually
- Needs-based grants from the federal government, the state government, or the college itself; this involves filling out the Free Application for Federal Student Aid and your state’s equivalent form
- Work-study and other part-time jobs
- Opportunity tax credits available through federal and state governments; the federal one is worth $2,500 per year
- Community college as a low-cost option for up to two years before transferring to a four-year institution
In whatever way you finance your child or grandchild’s education, the best advice would always be to start as soon as you can and to engage the expertise of a qualified financial advisor. An advisor can make sure you’re on track and not miss any new opportunities.