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Who’s Paying The College Bills?

Whether you are sending your kids to college this year, or are preparing for it, now is the time to work out how those bills are going to get paid. There are many options, but choosing what’s right for you in terms of values, investments, etc. is critical in funding college education.

Costs

When calculating the price of any college or university, you should consider all aspects of expenses associated with higher learning. The total package can include:

  • Tuition and fees
  • Books
  • Room and board
  • Lifestyle expenses, including food and entertainment
  • Additional costs, such as car payments if driving to school, and travel expenses if studying abroad

Tuition, school fees, and room and board are usually the most significant expenses. However, additional college expenses can add up to thousands of dollars each year, so it’s important to factor these other costs into college payment plans.

Funding

To save and fund your children’s college expenses, here are some strategies to consider:

Dedicated college funding accounts—529 accounts and ESAs

This is the preferred method of paying for college if the child already has a 529 account or ESA set up. We often advise clients to open a 529 account early on, fund it, and have the money invested in the markets so it benefits from growth over the longest time horizon possible until college.

It is important to discuss with your financial advisor what the 529 market value goal should be, because there are considerations to a 529 account when there is a leftover balance. Unused 529 amounts can be rolled over, tax-free, to another beneficiary/qualified family member. If funds are withdrawn for anything else, other than education expenses, the leftover funds will be treated as taxable income plus a 10% penalty. We can help clients and prospects analyze these scenarios and figure out the best solutions.

Retirement accounts—Roth and traditional IRAs

Tapping into retirement accounts may not be a bad idea, especially if you have a large balance and you might not need it all for your own retirement.

With funds from an IRA, a parent or student can pay for what are known as qualified education expenses—tuition, fees, books, supplies, and equipment required for enrollment or attendance—without facing the 10% penalty for early withdrawal.

  • As long as the student is enrolled at least half time, room and board are also considered qualified higher education expenses.

A Roth IRA is funded by post-tax dollars, while a traditional IRA is funded by pretax dollars. Though both types of IRAs can be used to pay for educational expenses, those who take early distributions from a traditional IRA will still have to pay income tax on that amount. For this reason, we believe that the Roth IRA is preferable over the traditional IRA when paying for higher education expenses.

Taxable money—Income and savings

Awarded money—Scholarships and grants
  • More than eight in 10 families tapped these options, money that does not have to be repaid.
Borrowed money—Loans or borrowed funds

This option should be evaluated along with your financial advisor to consider the pros and cons. More often than not, interest rates for student loans are fairly high and if other means of covering for the cost are available, those should be considered first.

  • Loans from family members might be a good option, using the applicable federal rate. In today’s environment, this is a fairly cheap source of financing.

According to Sallie Mae, families spent an average of $30,017 on college in the academic year 2019–20. Parents covered 44% of costs, or $13,072, using income and savings. More parents used income in 2019–20 to help pay (70% in 2019–20 versus 55% in 2018–19), and significantly more used a dedicated college savings account like a 529 plan (37% in 2019–20 versus 21% in 2018–19).

Slightly more than half of families (52%) have a plan to pay for all years of college, up from 44% in 2018–19 and the highest percentage in the history of the study. Nine in 10 families (91%) agree college is an investment in the student’s future, and 80% believe attending college is part of the American Dream, up from 74% in 2018–19.1

Paying for college and planning around it is a discussion that should happen early on between parents and their financial advisors. (529 plans can be opened as soon as the child is born, which allows the funds to grow for a longer time.) At Columbia Pacific Wealth Management, we provide our clients with the tools intended to assist in achieving their goals and plan for the future. Because there are several ways to fund college education, knowing the family’s financial picture, income, and all other goals allows a financial advisor to prepare a plan that is tailored for their specific needs. Contact us to learn more.


Sources:

1 https://www.salliemae.com/blog/infographic-how-america-pays-for-college-2020/

Important Disclosure Information:

Different types of investments involve varying degrees of risk, including the risk of loss of your entire investment. Past performance is not indicative of future results. CPWM and its employees can give no assurance that the performance of any specific investment recommendation or investment strategy discussed herein, whether directly or indirectly, will be profitable, or that it will be equal to any historical performance level discussed herein. The discussion or information contained herein is not intended to be, and should not be deemed as, personalized investment advice. The recommendations made may not be suitable for your specific individual situation and we encourage you to discuss with your financial professional before undertaking any investment strategy or recommendation contained herein. The discussions contained in this blog is current only as of the date hereof and may change due to a number of factors, including varying market conditions.

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