College Planning

This time of year, many high school seniors are weighing college admission and financial aid offers and dealing with most likely the biggest decision they’ve had to make in their lives. A major factor in this decision, for most students, is the financial perspective – how much can I afford?

Many people make disastrous choices when they do not fully understand the way college funding works. These choices can lead to owing large sums of money to various lenders and many years paying them back. Mindlessly mailing off a deposit checks to reserve a place in the Class of 2020 without fully reviewing and comprehending the costs associated and the affordability angle can lead to one of these disasters.

When it comes to paying for college, student loans are indeed the norm, rather than the exception. This article looks at the costs of college, how people are affording to attend, and what you may be able to do to help your children, grandchildren or great grandchildren.

Escalating Costs

The average annual cost of tuition, fees and room and board at private nonprofit four-year colleges and universities totaled $42,419 in 2014-15, up 3.6% over a year prior. At public four-year colleges, that figure was $18,943 for in-state students, up 3%.

Over the past 5 years, the total cost of college tuition and fees at a public four-year university has increased an average of 5.4% per year. At this rate, by the time children born today attend college, they will have to deal with tuition costs that are over 2.5 times current prices.

Below is a chart that shows the average all-in cost (tuition, room and board, fees) to attend public and private institutions beginning in 2004 and up through the current academic year.

Since 1980 the cost of higher education has been rising about twice as fast as the Consumer Price Index (CPI), otherwise known as inflation. But there is no arguing that a college degree can dramatically increase a student’s earning potential. In 2011, a typical bachelor’s degree recipient can expect to earn 65% more than a typical high school graduate over their working career.

Paying For College

Public colleges and universities used to depend mostly on state funding to keep their doors open, but they are increasingly relying on money from families paying ever-rising tuition. Even though states increased higher education spending in 2014, tuition accounted for nearly half of public college revenue for the third year in a row, according to a new report from the State Higher Education Executive Officers Association.

Many advocates say that college has become unaffordable for many families because of lower funding from state governments. There has been a seismic shift in the way public colleges are funded in just the last 26 years. In 1989, tuition made up a quarter of the total education revenue at state universities. By last year, those dollars accounted for 47.1% of the money colleges need to educate students, the report said. While that’s down from the all-time high of 47.7% in 2013, it still represents a significant change in funding.

Families pay much of the cost of attending college out of pocket, but they rely on grants, loans and other sources to help cover the tab. The average person from the Class of 2014 owes $33,000, the most on record. A greater number of students is also borrowing to pay for college – about 70% of bachelor’s degrees for last year’s graduating class. Educated millennials are focused on paying off student debt and meeting other current financial responsibilities like rent.

For many young adults, exiting their college years and entering the workforce with sizable debt can be a life-long financial challenge.

Education Legacy with a 529 Plan

If you have children, grandchildren, nieces, nephews or anyone for whom you’d like to provide a great financial leg-up, you should consider establishing a 529 college savings plan for them. We look at this as an education legacy, in that it will provide opportunity and be a gift that continues to give long after the funds have been used to pay for college.

529 plans are not only effective college savings vehicles, they also have unique gift and estate tax benefits not found anywhere else in the federal tax code. These benefits have great appeal for affluent clients concerned with optimizing their estate planning.

But there are several complications grandparents and other would-be benefactors should understand. For instance, any student’s 529 plan contributions will be capped — generally at $300,000, though limits vary by state.

High-net-worth clients should also know that giving any individual more than $14,000 per year (for 2015) by a single person or $28,000 by a married couple would trigger the gift tax.

If you are interested in giving a sizeable sum in one fell swoop, you are permitted to “front load” a 529 account with up to 5 years’ worth of gifts: $70,000 ($14,000 x 5) for a single person or $140,000 for a married couple. Once you exceed that amount, gift taxes must be paid. And any time you exceed the $14,000 amount in a year, you must file IRS Form 709 (the federal gift tax return) at the same time as your income tax return.

This option may appeal particularly to clients with taxable estates – since 529 plans present a way to move money out of an estate immediately.


If you have any questions about saving for college for your family, asset allocation, or the 529 plan, please contact the financial planning experts at Apex Financial Advisors.

The College Board
The Wall Street Journal
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Financial Planning Magazine