Get ahead of college debt now
- While education costs continue to rise, so does the value of a college degree
- College saving plans can help you keep up with rising tuition costs
- Saving for education expenses could lower your tax burden
The numbers can be staggering: 71% of students come out of college with loans, and the average debt per graduate can be $30,0001 or more, depending on the type of school attended. The overall education debt of $1.48 trillion nationwide exceeds all outstanding credit card balances combined.2
These statistics aren’t that surprising, considering four years at a private college with room and board just topped $179,000 and $73,000 for a public university, according to 2017-18 figures from the College Board.3 The good news? Higher education continues to offer a significant return on investment, with college students earning twice as much as those without degrees.4
With student loan debt and education costs at all-time highs, many parents are examining which tradeoffs are the most effective when trying to keep their kids out of debt while also staying on track to a confident retirement.
So where do you start? First you’ll want to define education goals and associated costs. Then you can begin building an education savings strategy.
Your advisor can assist with projecting future educational costs, addressing more complex planning needs for multiple children and finding the best savings strategy for your goals.
Here are three education savings vehicles that could help you stay ahead of rising costs.
1. 529 saving plans
Commonly referred to as “the 401(k) of education savings,” this popular education investment tool allows earnings to grow federally tax-deferred. Many states offer tax breaks as well, including deductions for contributions and tax-exempt distributions used for qualified expenses. Anyone can invest in a 529 — from grandparents to kids wanting to pitch in on their education.
The best part? Distributions aren’t taxed at the federal level as long as they’re spent on qualified education expenses. Nearly every state offers at least one 529 plan, and the funds can be used at any accredited college or university in the country (as well as some foreign institutions).
With the new tax law passed at the end of 2017, withdrawals from 529 plans – up to $10,000 a year – may now also be used for K–12 education expenses. This gives investors the choice to apply funds toward either college tuition or private school expenses for younger children or grandchildren.
Keep in mind that not all 529 accounts provide an extensive selection of investments which may impact how investors can balance risk and growth. Your advisor can help you select a plan based on individual needs and goals.
2. Coverdell savings account
Another option is a Coverdell Education Savings Account (CESA), which was left unchanged in the latest tax law. A CESA can be used for college tuition as well as K–12 education expenses for younger family members. Like a 529, earnings grow tax-deferred, and qualified withdrawals are exempt from federal and often state taxes. Contributions are limited to $2,000 annually per beneficiary, so these accounts are often used in tandem with a 529 plan.
Unlike a 529 plan, income restrictions apply and a CESA is more limited when it comes to age — contributions must be made before the beneficiary reaches age 18, and withdrawals must be made before the beneficiary reaches age 30, unless the child is a special-needs beneficiary.
How potential savings over an 18-year period could help pay for the average cost for 4 years at a private college5:
3. Cash value life insurance
A less familiar possibility is using a portion of cash-value life insurance to help pay for college. When properly structured, this type of policy can provide coverage for the owner’s entire life, has the potential to accumulate in value and the cash value portion can be used for many purposes.
While protection (i.e. the death benefit) should be the primary objective for purchasing cash-value life insurance, additional objectives may be appropriate when combined with protection if they align with the product’s ability to meet the client’s additional needs. That said, a portion of the policy may be tapped for educational or other purposes by making a withdrawal or taking out a loan* — or some combination of the two.
Contact your advisor
For a complete assessment of these savings vehicles and more, talk to your advisor.