Higher Education College Saving and Funding Strategies
Why is higher education so important? Consider these potential benefits: • College offers students the opportunity to broaden their horizons with new people, ideas, and experiences. • College graduates earn more, on average, than those with only a high school diploma. • College-educated adults are more likely to be employed, even during hard economic times. • College can foster lifelong learning and civic participation, enhancing personal and professional growth. Source: U.S. Bureau of Labor Statistics, 2022 For many Americans, college is a dream, a goal, and a family responsibility.
An investment in knowledge pays the best interest. — Benjamin Franklin Source: BrainyQuote.com
College is expensive, but year after year, families say they are willing to stretch themselves financially for the opportunity to invest in their children’s future — not only for potentially higher earnings but also for the intellectual and social benefits. Source: Sallie Mae, 2022 An Investment in the Future
College Pays A college degree cannot guarantee a job, of course, but it can be a powerful asset. The data below shows 2021 earnings and unemployment rates by educational attainment. Professional degree Some college, no degree Associate’s degree Bachelor’s degree Master’s degree Doctoral degree High school diploma No high school diploma $99,268 $50,076 $69,368 $81,848 $100,048 $42,068 $32,552 $46,748 Median annual earnings Unemployment rate 1.5% 8.3% 6.2% 5.5% 4.6% 3.5% 2.6% 1.8% Source: U.S. Bureau of Labor Statistics, 2022 (2021 data for adults age 25 and older)
Rising College Costs $53,430 $23,250 $111,077 $87,032 $68,192 $48,335 $37,872 $29,674 Private Public (in-state) (in 2022 dollars) Over the past decade, total costs for tuition, fees, room, and board increased by 2% at four-year public colleges and by 6% at four-year private colleges, after adjusting for inflation. What will college cost for your child? The chart below projects the future cost of tuition, fees, room, and board, assuming a 3% annual inflation rate. $60,000 $100,000 $160,000 $140,000 $120,000 $80,000 $40,000 $20,000 $0 Source: College Board, 2022 2022–23 2037–38 2032–33 2027–28 2042–43 $141,766 $61,689
Typical Student Budgets Tuition, fees, room, and board account for a large percentage of college costs. However, there are other significant expenses to consider, including books and supplies, transportation, and miscellaneous expenses. This chart illustrates the average estimated cost of attendance at four-year public and private colleges and universities for the 2022–23 academic year. $4,690 $39,400 $14,030 $4,140 $10,940 $12,310 annual cost $57,570 $27,940 Public 4-year in-state, on-campus Private nonprofit 4-year, on-campus Sources: College Board, 2022 Books, transportation, & other expenses Room & board Tuition & fees annual cost These costs are for one year. Without accounting for inflation, four years of college might cost: $111,760 at a four-year public college $230,280 at a four-year private college Also consider that it may take some students more than four years to complete a college degree.
Student borrowing Grants & scholarships Parent borrowing Parent income & savings Student income & savings Relatives & friends Families typically use multiple sources to pay for college. Although grants and scholarships may play an important role, the largest percentage of funds usually comes from parents and students in the form of savings, current income, and loans. Paying for Higher Education About 81% of families factor in the price of a college when narrowing their list of schools. Source: Sallie Mae, 2022 10% 26% 2% 11% 8% 43%
What Savings Options Will You Use? Families save for college in many ways, as listed below. These savings vehicles are described later. • 529 savings plan • 529 prepaid tuition plan • Coverdell ESA • Retirement plan • Investments (e.g., stocks, bonds, mutual funds) • Savings accounts, CDs, money market funds
Tax-Advantaged Savings: 529 Plans & ESAs Two types of tax-advantaged plans are specifically designed to help families save for higher-education expenses: the 529 savings plan and the Coverdell Education Savings Account (ESA). Although contributions to these plans are not tax deductible, withdrawals — including any earnings — are free of federal income tax if they are used to pay qualified highereducation expenses, including tuition, fees, room and board, books, and supplies. 2021 2022 Total number of accounts 14.8 million 15.1 million Total account assets $452 billion $388 billion Source: ISS Market Intelligence, 529 Market Highlights, Q4 2021 & Q4 2022 A greater proportion of college savings are held in 529 savings plans than in any other savings vehicle. 529 savings plans Source: Sallie Mae, 2022
As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan and a Coverdell savings account. There is also the risk that the investments may lose money or not performwell enough to cover college costs as anticipated. Nonqualified withdrawals of earnings may be taxed as ordinary income and subject to a 10% federal income tax penalty. The tax implications of a 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state, and some states may not adopt the 529 savings plan provision for K–12 tuition. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These state benefits may include financial aid, scholarship funds, and protection from creditors. Before investing in a 529 savings plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses —which contain this and other information about the investment options, underlying investments, and investment company— can be obtained by contacting your financial professional. You should read these materials carefully before investing. • Annual contribution limit: $2,000 per child (under age 18) • Income eligibility limits (based on donor’s adjusted gross income) • Assets must be used by the time the beneficiary reaches age 30 (with some exceptions) • Funds may be used for qualified elementary, secondary, and higher-education expenses • Flexible investment options Coverdell Savings Account • Higher contribution limits (set by each state) • No income eligibility limits • Typically no beneficiary age restriction (open to adults and children) • Funds may be used for qualified higher-education expenses and K–12 tuition • Limited investment options; some age-based options automatically become more conservative as the child ages 529 Savings Plan
$21,388 Average account balance in a 529 savings plan at end of 2022 Source: ISS Market Intelligence, 529 Market Highlights, Q4 2022
Employer-Sponsored Plan Withdrawals Most employer plans allow loans (up to a maximum of $50,000) but limit the amount to 50% of the participant’s vested assets. If you choose this option, youmust repay the loan (generally, over a five-year period), but you would be paying the interest to yourself, not a financial institution. One caveat: If you lose your job, youmay have to repay the loan immediately. If you are participating in a tax-deferred retirement plan — such as an IRA or an employer-sponsored plan — you could use some of these funds to help pay for college. However, if you choose to use retirement funds, you would be reducing the money that will be available in retirement. There are many ways to fund a college education, but there are no scholarships for retirement! Using Funds from Tax-Deferred Retirement Plans Generally, withdrawals from traditional IRAs andmost employer-sponsored retirement plans are taxed as ordinary income. Distributions taken prior to age 59½ may be subject to a 10% federal income tax penalty (with some exceptions, such as the IRA higher-education exception described). IRA Withdrawals IRAwithdrawals used for qualified higher-education expenses (such as tuition, fees, and supplies) are not subject to the normal 10% federal income tax penalty that applies to early distributions before age 59½. This money can be used not only for your children’s higher-education needs but also for those of yourself, your spouse, and your grandchildren. Even so, all withdrawals of tax-deferred assets are taxable as ordinary income. If you have a Roth IRA, regular contributions (but not earnings) can be withdrawn at any time, for any reason, without any income tax liability or early-withdrawal penalty. For a qualified tax-free and penalty-free withdrawal of Roth IRA earnings, distributions must meet the five-year holding requirement and take place after age 59½ (with some exceptions, such as the IRA higher-education exception described).
Tax-advantaged savings vehicles have limitations on the amount you can save each year, whereas taxable accounts aren’t constrained by contribution limits. You don’t want to gamble with your child’s education, so you should generally choose investment vehicles that have risks with which you are comfortable. Remember that the more potential for growth offered by an investment, the more risk it may carry. If you start saving for college when your child is young, you have a longer time horizon and may choose to take a more aggressive approach to investing. If you have a shorter time frame, you may want to take a more conservative approach. Sample Asset Allocation Models These hypothetical portfolios are shown for illustrative purposes only. They are examples, not recommendations. Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. Investments offering the potential for higher rates of return also involve a higher degree of risk. Other Savings Vehicles Stocks 75% Bonds 20% Bonds 50% Stocks 30% Cash alternatives 20% Cash alternatives 5% Aggressive allocation Conservative allocation College 10+ years away College 2+ years away
Savings accounts, CDs, and money market funds are relatively safe ways to save for college, but the potential for growth is very limited. The Federal Deposit Insurance Corporation insures CDs and bank savings accounts at FDIC-insured institutions for up to $250,000 per depositor, per institution. CDs generally provide a fixed rate of return. To increase performance potential over time, you might choose to invest in stocks, bonds, and mutual funds. With thousands of mutual funds available, you should be able to find funds that are appropriate for your time frame and investment objectives. The return and principal value of stocks, bonds, and mutual fund shares fluctuate with changes inmarket conditions. Shares, when sold, may be worthmore or less than their original cost. Bonds are subject to interest-rate, inflation, and credit risks. As interest rates rise, bond prices typically fall. If not held to maturity, bonds may be worthmore or less than their original cost. A bond fund’s performance can be affected by the risks associated with the underlying bonds in the fund. Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Although a money market fund attempts to maintain a stable $1 share price, you can lose money by investing in such a fund. Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. Families reported paying $25,313, on average, for college in the 2021–22 school year. Source: Sallie Mae, 2022
During the 2021–22 academic year, undergraduate students received more than $234 billion in student aid, including grants, loans, education tax benefits, and work-study programs. Federal grants* Financial Aid Federal work-study Federal education tax credits & deductions Other grants** Federal loans *Federal grants include Pell Grants and veterans benefits. **Grants from states, institutions (including colleges & universities), private parties, and employers. Source: College Board, 2022 (percentages do not total 100 due to rounding) Financial Aid 35% 0.5% 5% 44% 16%
Financial aid is typically awarded based on need. In order to be considered for aid, you have to complete the Free Application for Federal Student Aid (FAFSA) for each year that your student attends college. The FAFSA uses a formula based on family income and other factors to calculate your Student Aid Index (SAI), also called your Expected Family Contribution (EFC). Your SAI is then subtracted from the cost of attendance for a specific school to determine the amount of aid for which your student may be eligible. Aid will typically be awarded as a combination of loans, grants, and (in some cases) work-study programs. Net Price Calculators A net price calculator is available on every college website. It can provide an estimate of howmuch grant aid your child is likely to receive at that school, based on his or her academic profile and your family’s financial information— allowing you to find out what your “net price” might be before your child even applies. Grants and Scholarships Grants and scholarships can be need-based or merit-based, and can be awarded based on a variety of factors— ranging from academic or athletic achievement to religious affiliation or ethnic background. Colleges are generally the largest source of grants and scholarships, but many other organizations offer them as well — religious organizations, community groups, and corporations, to name a few. Some organizations offer scholarships as a means to attract students to a specific field of study or a particular degree.
Three types of federally sponsored loans are available to help students and parents pay for college. 42.8 million borrowers have federal student loan debt. The average balance is $37,787. Source: educationdata.org, 2022 College Loans A fixed, low-interest federal loan available to undergraduate and graduate students who demonstrate the greatest financial need. The school is the official lender, but not all schools participate in the Perkins program. While the student is in school, interest does not accrue and no loan payments are due. Repayment with interest generally begins nine months after the student leaves school. Another type of low-interest federal loan available to undergraduate and graduate students. Direct Subsidized Loans (for undergraduates only) are based on need, and the government pays the annual interest while the student is in school. Direct Unsubsidized Loans are not based on financial need, and interest accrues while the student is in school. Repayments for Direct Loans are delayed until six months after the student leaves school. Available to parents of dependent undergraduate students (as well as to graduate students). The government is the lender, but the interest rate is somewhat higher than Perkins or Direct Loans. Parents can borrow up to the total cost of attendance minus any other aid received. Repayments and interest accrual begin after loan funds are fully disbursed, but parents may request a deferral of payments while the student is in school. Federal Perkins Loan Direct Loan Direct Plus Loan 1 2 3 Private student loans are also available, but they usually carry significantly higher interest rates and have less flexible repayment options than federal loans.
This hypothetical example is used for comparison purposes only and does not represent any specific investment or loan. Actual results will vary. $139,327 Monthly cost $1,161 Total cost 15 years 15 years 10 years 10 years $350 Although federal student loans typically have low interest rates, the cost of borrowing can still be very expensive compared with the financial resources required to accumulate savings. Consider the hypothetical example below, which compares a savings program to accumulate $100,000 over 15 years with a $100,000 loan (with a 10-year payoff period). The total out-of-pocket cost would be $63,000 for saving and investing, compared with paying $139,327 in principal and interest for borrowing. Borrowing Versus Saving Saving (15 years, 6% average annual return) Borrowing (10-year loan, 7% interest rate) $63,000
Paying for college requires a savings commitment as well as an understanding of other funding options. Whether you envision a newborn attending college in 18 years or your high school student enrolling next year, the sooner you act, the greater opportunity you may have to pursue your higher-education goals. Prepared by Broadridge Advisor Solutions © 2023 Broadridge Financial Solutions, Inc.
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