From Winnie-The-Pooh to PhD. – Planning Your Family’s Education
By Rob Wrubel, CFP®, AIF®
“To the uneducated, an A is just three sticks.” – A.A. Milne
Many of us grew up listening to and reading Winnie The Pooh. We learned some of life’s lessons from the friends of the Hundred Acre Wood – energy and enthusiasm from Tigger, pursuit of pleasure from Pooh, sage wisdom from Owl – and looked for ways to avoid Eeyore’s fate. A.A. Milne’s works are considered classics of children’s literature. They have provided many children the entertaining stimulus needed to move from listening to stories to learning how to read.
Today’s world and workforce demand higher and higher levels of education. Reading is critical to be able to surf the web, navigate a store and perform in so many jobs. A report from The College Board called “Trends in Higher Education” shows that high school graduates earned, on average, $33,800 per year in 2008 while those with bachelor’s degrees earned $55,700. Those with professional degrees averaged $100,000. These statistics are based on full-time year-round workers ages 25 and older.
College may not be right for everyone. There are plenty of ways to earn income and to create a fulfilling life. That being said, it is hard to dispute the value of college in today’s knowledge based economy.
Education for family members often ranks as one of the highest priorities for many of our clients. The financial planning discussions with these families include conversations about the best ways to save and invest money for education.
College expenses almost demand the need to start developing a plan to pay for future education expenses soon after a child is born. Private colleges have broken the $50,000 mark and many states have been forced to increase tuition for all students. A quick Internet search shows between $10,000 and $15,000 per year for in-state tuition.
Planning is the most important factor, as it gives you the time to decide how to fund education expenses and which types of investment vehicles and strategies to use.
Many families fund college from current income. They have enough income to support the additional expenses each year from employment or investment income. Colleges and universities love these families as their payments do not require use of endowments to fund the student. Families planning to use this strategy need to consider their ability or desire to change their lifestyle if needed. Two children at private school translates into $100,000 of after-tax earnings being spent on education. For those with young children or grandchildren, this means a look into the future to decide if employment and assets are secure enough to handle the payments and to decide if they really want to change lifestyle during those years to pay for college.
Dedicated savings plan
There are several tax preferred options families can use to pay for college expenses, including 529 savings plans, Coverdell ESA accounts, pre-paid tuition (a separate type of plan under section 529), UTMA/UGMA accounts and trusts. Most of the time, my preference is for the 529 plan. The 529 plan allows for contributions to an account with after-tax savings. The account grows on a tax-deferred basis. Money taken from the account and used for qualified expenses comes out without paying taxes. Some states allow for in-state residents to get a state income tax deduction for using certain plans, making the tax benefit of a 529 even better.
529 plans can be funded with gifts from parents, grandparents, friends and family. There is no restriction on who can contribute to the 529. The gift amounts follow federal gift guidelines for the most part. Certain family members can accelerate the gift guidelines and give up to five years of annual giving at once without the need to pay gift taxes. There are some restrictions so make sure to work with your investment and planning team to make the best decision for you.
Generally, the parent owns the 529 plan with a child being the named beneficiary. The owner of the plan has the ability to change the beneficiary at any point.
Most other types of plans have significant restrictions or tax issues that decrease their effectiveness for most families. Of course, trusts, UTMAs and other plans have their place depending in specific family needs and goals.
Students, or prospective students, can also work to fund their education expenses. Some families I work with consider this the most important factor in determining how to support their child through college. Families can match the amount earned and spent on college by the student. Most schools have work/study programs that help the student find an on-campus job to defray the costs of education.
Loans are the choice of last resort to pay for college. These often burden the graduate or the family with expenses lasting years and decades after the degree has been earned. Many families use loans to plug the gaps in funding needed for college and higher degrees. Too often, we see clients years and years removed from college who have yet to be able to pay off the loan. Families considering loans should discuss the long-term implications of them in achieving other life goals.
Our society today demands a population of educated people. While Pooh may say, “Oh bother,” most of us would not have the careers, interests and lives we have without a strong education. Let us know how we can help in the planning of your family’s educational goals.
Rob Wrubel CFP®, AIF®, is a Senior Vice President, Investments with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.