How much could a college education cost in the 2030s? Those of you with kids may want to take a deep breath and sit down before reading the next paragraph.
A MassMutual analysis projects that four years of tuition, room, and board at a private college will cost nearly $369,000 in 2031. An article at CNBC offers a slightly cheaper estimate, putting the total expense at $303,000 for a freshman setting foot on campus in 2036. (Today, the cost of four years at a private university is less than half that amount.) How about the price tag for four years of tuition, room, and board at a public university in that year? According to the same CNBC article, it might reach $184,000.
Even today, finding enough money to pay for college can be a huge challenge. There are obvious ways to counter the cost: a student can work full time and apply much of their own income toward school, or they can fund their education with student loans. Moreover, kids move to other cities as well for education and may have to also spend on living expenses. But those can be reduced by adjusting living style and taking all the necessary items from the home to a new place and not to forget there are inexpensive services available for everything including moving, for instance, search for affordable moving companies mechanicsburg pa (or elsewhere). As a parent, if you’re worried about your child taking on a more challenging path through school or getting buried in debt, however, there are some other solutions to explore when it comes to paying for college.
Ideally, you should use money you never have to repay. Yes, you read that right, and no, you aren’t hallucinating from the figures we presented earlier. Grants and scholarships are way more abundant than many people realize, and some even recruit for applicants. Grants are most likely need-based, whereas scholarships offer merit-based aid. Grants can be issued incrementally or in lump sums to a student; most are awarded on a first-come, first-serve basis, which is why it is so crucial to fill out the Free Application for Federal Student Aid (FAFSA) early. A school accepting your student will evaluate your student’s FAFSA, then send an award letter detailing his or her eligibility for federal and state grants. As for scholarships, there are literally millions of them. Sallie Mae provides an online search tool (www.salliemae.com/college-planning/tools/scholarship-search/) to explore more than 5 million such awards, and you can use it to drill down to prospects that are strong possibilities for your student.
Through a 529 plan, you can invest to meet future college costs. 529 plans come in two varieties, and both varieties have common tax advantages. 529 plan earnings are exempt from federal income tax, and 529 plan assets may be withdrawn, tax free, so long as the money is used to pay for qualified education expenses. While there are no federal tax breaks linked to 529 plan contributions, more than 30 states offer state income tax deductions or credits for them, including Maryland.
Some 529 plans are prepaid tuition plans, giving you the option to pre-pay up to 100% of your student’s future tuition at a public university within your state (most of these plans do not pay for housing costs). You may be able to convert a prepaid tuition plan so that the assets can be used to pay tuition at an out-of-state university or private college.
The great majority of 529 plans are college savings plans, similar to IRAs. In a college savings plan, you can direct your contributions into equity investments, which offer you the possibility of tax-advantaged growth and compounding. However, if the investments perform badly, your college fund may shrink.
You may choose to fund a 529 plan account incrementally or with a lump sum. States put different limits on the amount of money that a 529 account can hold, but six-figure balances are often allowed. You can invest in any state’s 529 plan and pay for higher education expenses with 529 plan assets at any qualified U.S. college or university, so where you student chooses to attend university need not be a concern.
Some families get creative, using Roth IRA assets to pay for college. A Roth IRA gives you a degree of flexibility that a 529 plan does not. Suppose your child does not go to college. While this may seem unlikely, plenty of young adults do start successful careers in trade or industry without a college education. In that event, you still have a Roth IRA: a tax-favored retirement savings account with the potential for tax-free withdrawals.
A Roth IRA is not a perfect college savings vehicle, however. First, the annual contribution limit is low compared to a 529 plan. Second, while you may withdraw an amount equal to your contributions without penalty at any time during your life, a Roth IRA’s earnings represent taxable income when withdrawn, with a potential penalty if the earnings are withdrawn prior to the account owner obtaining age 59 . Third, while Roth IRA assets are not countable assets on the FAFSA, tax-free Roth IRA contributions, once withdrawn, still amount to untaxed income for your student (i.e., the Roth IRA beneficiary), and they lower a student’s eligibility for need-based aid.
The Bottom Line: Going to college should not mean going into debt. Would you like to plan, save, and invest to reduce or avoid that consequence for your student? We encourage you to reach out to us at Kendall Capital to evaluate your options.
