Cost Of College Derailing Parents Retirement
Parents & Grandparents Risk Financial Security For Students’ Education
A generation ago, a much smaller number of American high school students planned on attending college in the future. Today, nearly 70% of high school graduates are enrolling in college. The increase in the number of students attending college, along with skyrocketing tuition costs, has left many families financially unprepared for higher education. Increasingly, parents and even grandparents scrambling to pay college costs are setting themselves on a path towards a financial crisis.
A survey conducted by student loan lender Sallie Mae, found that only 48% of parents with kids under the age of 18 are saving for college. Feeling a responsibility to help their children pay for college, but not having properly prepared, parents (and grandparents) are making financial missteps. Some are opting to take early distributions from their 401(k) plans, which have a double whammy negative impact. First, there can be tax consequences, and more importantly, these withdrawals erode funds available after retirement. Other parents are forgoing or reducing the money they contribute to retirement accounts.
With nearly half of parents not being fully prepared for the financial strain of their kids obtaining a college degree, many turn to student loans to cover costs. In some cases, the students are solely responsible for repaying the debt. However, many parents and grandparents co-sign for student loans. If the student defaults on these loans, the responsibility falls on the co-signer. Since student loans cannot be discharged through bankruptcy, it often leaves parents or grandparents in a financial crisis.
STATES NOW OFFER COLLEGE ASSISTANCE
A number of states are acknowledging the challenges of paying for college and have stepped up with a solution that benefits students and workforce development. New York State recently introduced its Excelsior scholarship, which will help to retain talent in the state, as well as, help students defray the cost of attending college. The Excelsior scholarship offers free tuition at NY state public colleges and universities for in-state students from households earning up to $100,000. One of the requirements of the scholarship is that upon graduation the scholarship recipient must live and work in New York for as many years as they have received tuition assistance. Tennessee and Oregon have both also began to offer free tuition at their two-year community colleges. Several other states are in the process of rolling out free college programs for residents.
If you don’t live in a state that offers in-state scholarships, there are a number of ways to tackle the tuition challenge. There are a number college savings solutions including: 529 college savings plans, Coverdell Education Savings Account (ESA) and the Uniform Gifts to Minors Act and Uniform Transfers to Minors Act (UGMA/UTMA). Each of these savings options offers different benefits and can be opened by a friend or relative on behalf of a student.
529 COLLEGE SAVINGS PLAN
A 529 college savings plan is a tax-advantaged account that allows parents to invest money towards college tuition and other education-related costs. Although 529 contributions do not qualify for federal tax deductions, thirty four states offer state tax deductions. These college savings plans are offered by a number of investment sources and each 529 offers its own investment options. Plan investments may include age-based strategies; conservative, moderate, and aggressive portfolios; or even a mix of funds. If the 529 funds are used for the qualified educational purposes, there are no federal income tax or investment gains on the distributions.
A 529 plan also allows for flexibility with fewer restrictions on income or age limitations. Anyone over the age of 18 is able to open and fund a 529 plan. These plans can also be easily transferred from one beneficiary to another, allowing for any excess funds to be passed to other students in the family.
COVERDELL EDUCATION SAVINGS ACCOUNT
Another option is a Coverdell Education Savings Account (ESA), which can help parents save $2,000 a year after tax. With ESA’s the distributions, including any earnings, are tax-free. The beneficiary must use the distributions for education-related expenses. There are age limitations with ESA’s. Once the beneficiary turns 18 contributions must stop. In addition, there are income level caps. A person, filing single, with an adjusted gross income above $110,000 and those who file jointly with an adjusted gross income above $220,000 cannot contribute to a Coverdell Education Savings Account.
CHARITABLE GIFTS TO STUDENTS
One solution for grandparents looking to help their grandchildren with the burden of college education is the Uniform Gifts to Minors Act and Uniform Transfers to Minors Act (UGMA/UTMA). This allows family members to gift securities and other assets to minor students. Doing so offers tax advantages for grandparents or others to shift their wealth to students. Typically, the student is taxed at a lower rate than the grandparents or relatives. This method provides college funding and can also save families a significant amount in taxes.
The best advice for managing college education costs is to start saving as soon as the child is born. If you haven’t done that, start saving now. Anything is better than having nothing to put towards college. There is no need to jeopardize retirement or financial security in order to defray the cost of college tuition. If you would like guidance in selecting a financial plan for funding education or making charitable gifts to family, please contact a River Wealth Advisors.