Last night, our Palatine team at DWM performed a presentation for the parents of students attending Quest Academy, a private K-12 school right here in Palatine, IL. The focus of the night was putting a spotlight on two important topics, tax reform and college savings. We’ve covered the effects of tax reform quite a bit in blogs from the past few weeks, so we wanted to focus in on the savings portion of the presentation for our blog this week.
College costs are rising, with no end in sight. Tuition prices for public and private universities increase yearly by approximately 4-8% consistently, which put them right up there with housing and gas prices as the leaders of inflation (though college costs experience much less volatility then either of the others). Per Figure 1, we can see the effect of this inflation, with tuition at an in-state public university costing parents over $100,000 over the four years of collegiate study. With inflation rates as they are, these numbers are only going to get larger.
Figure 1: College Tuition Costs
So, as we presented last night, how can parents of children expect to be able to pay these high price tags?
Luckily, there are several different options available to parents and children alike that can help offset the huge costs of college. These different solutions vary from federal financial aid, merit-based scholarships, savings, and loans.
Let’s start with federal financial aid. The path to being awarded federal financial aid starts at the same spot for each family, the Free Application for Federal Student Aid, commonly referred to as the FAFSA form. This document helps many domestic colleges determine how much, if any, federal aid your child should be allotted. To determine this, the FAFSA form interprets your financial situation based on their calculated Expected Family Contribution (EFC), or essentially how much money the parents of a student will be able to contribute to their child’s college tuition. To determine the EFC amount, many factors including the family’s taxed and untaxed income, assets, and benefits (such as unemployment or social security) are evaluated. Retirement assets are not considered in this calculation. For example, any money held in an IRA or 401k plan will not be counted towards the EFC, since those funds cannot be used for college tuition. However, money held in a checking or brokerage account will factor into the EFC when calculating federal financial aid. One important caveat to this is that any funds held in the student’s name will be weighted more heavily towards the EFC calculation than those assets held in the parent’s name. For a quick reference, please see Figure 2 below, which gives an approximate federal aid allotment based upon your EFC and the number of children you have.
Figure 2: https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/troyonink/2017/01/08/2017-guide-to-college-financial-aid-the-fafsa-and-css-profile
Another college funding solution is the use of merit-based scholarships, which are awarded by the schools themselves, based on a student’s academic, athletic, music, or other merits. If a student shows exceptional talents, colleges are likely to offer these students grants in order to entice them to coming to their college. These scholarships tend to be offered for at least four years of college depending on their eligibility, and can often be a hefty sum of the tuition costs (some being the full amount)! Besides the colleges themselves offering these scholarships, there are various online sources that have private funding that is given out to students who apply to them. We have done some research on these websites, and have included some of the most popular ones at the bottom of this blog. Please feel free to check them out with your student!
One of the major college funding methods that students and their parents utilize is through savings. Besides holding assets in a bank or brokerage account to pay for their child, parents have some other ways of saving money specifically for college funding that can be great resources also for tax purposes! One of the best of these vehicles is a 529 plan. In Illinois, we like the Illinois Bright Start and Bright Directions 529 platforms, and in South Carolina, our team likes the Future Scholar 529 platform. What these programs offer is a method for holding college funds and investing them, allowing for compounding tax-free growth! By contributing to these accounts, taxpayers can annually take advantage of a $10,000 state tax deduction ($20,000 for married couples) for Illinois, and can utilize the $15,000 dollar gift tax exclusion on the transfer as well, helping to lower the taxes for the parents, and save a lot of money for their child quickly. In comparison, South Carolina offers an unlimited state deduction for all contributions to a 529 plan. In conjunction with this, in all states parents are able to take advantage of a “Five-Year Forward” funding method, which allows for up to $150,000 to be contributed to a 529 plan in one year, and as long as no extra contributions are made in the following four years, the entire amount qualifies for five years of the gift-tax exclusion, a fantastic strategy for savings and estate planning, for parents and grand-parents alike! As part of the recent tax reform, the government has expanded the use of these plans to allow parents to use these funds to pay for K-12 private schooling, though this could prohibit the use of the state tax deduction, which is still a grey area. Stay alert for more updates on this particular change.
Lastly, there are loans. Most students and parents have come to a modern consensus that student loans are extremely hard to pay off, and as of 2018, student loan debt does indeed sit at approximately $1.5 trillion, so whenever loans are taken, it is extremely important that parents take into account how these will be paid off. There are many different options when it comes to taking these loans as well, including federal versus private loans (government vs. banks), and deferral timings (“subsidized” start payments once graduated, “unsubsidized” start payments immediately). Some important aspects of loans to look at when researching them is to ensure that they have no application fee, a soft hit on credit pulls, and no fees for paying off loans early, so you get out with the least interest accrued as possible.
All in all, paying for college is a daunting task for any parent and student. However, by planning early and utilizing the many different methods of funding, both can find peace of mind and focus on the challenges presented in reaching a higher education, and less on how they are going to pay for it.
If you have any questions on any of the above information, please do not hesitate to reach out!
Scholarship resources to check out: