Many parents consider sending a child to college an important financial objective. The College Board reports that a public, in-state, four-year college had an average 2014-2015 tuition of $9,139. If room and board was included, the average annual education cost was $18,942.
For the 10-year period from 2005 to 2015, the College Board says public four-year colleges in the U.S. have increased tuition on an annual basis by an average of 3.5 percent. Though still higher than the average rate of inflation for the same time period, it is less than the average annual increase in tuition for the 20-year period prior to 2005, which had average rates greater than 4 percent per year.
So, what should parents and a potential college student do to prepare financially for college? Just like planning any major financial objective, you need to research, comparison shop, and have a consistent savings and investment strategy. The Pennsylvania Institute of Certified Public Accountants offers the following basics to help with the decision making process.
- Public four-year colleges, because they receive direct financial support from the state, will be less expensive for in-state students than out-of-state students. They will also be less expensive than private four-year colleges that do not receive direct state support.
- Community colleges that provide college credit for the first two years of college that can be transferred to a four-year college can provide excellent value.
- Scholarships will always provide the best value: they are tax free and do not need to be repaid as long as the student meets the scholarship requirements. In terms of planning, a student should work to excel academically to receive an academic scholarship. Even after a student begins college and has exceled in performance, some scholarships may be available.
A consistent saving and investing strategy should start early. That way the compounding effect of interest/return on investment can be maximized. Consider the use of tax-advantaged methods of investing such as these:
- Section 529 plans are set up by states. Though there are several variations (prepaid tuition and savings plans) and many rules, the basic benefit is that earnings on the investments are tax-free at both the federal and state level, as long as the investment is used for qualified college educational expenses when money is withdrawn. Many states allow for a tax deduction on its own state income tax on amounts contributed (if the party lives within that state and contributes to that state’s 529 plan). Contributions to a Pennsylvania Tuition Account Program (TAP) account, private programs, and programs of other states are deductible in determining taxable income for Pennsylvania personal income tax purposes.
- A Coverdell Savings Account can be established for a beneficiary/student by parties who are below certain income limits in which the money invested can grow tax-free as long as the money, when withdrawn, is used for qualified educational expenses. The annual contribution limit for a beneficiary for 2015 is $2,000 per year (no matter how many parties contribute).
For many middle- to low-income parents, the federal government provides need-based financial aid in the form of grants and loans and through other programs such as college work study. The major need-based financial aid that does not need to be repaid if certain conditions are met is the Pell Grant. The maximum Pell Grant for 2015 to 2016 is $5,775. A Free Application for Federal Student Aid (FAFSA) can be completed to determine eligibility for federal financial aid. Students and parents should work through a college financial aid office to secure such aid.
For those parents or students who have not been able to either save enough money or get sufficient financial aid, there are tax credits and deductions that are available, but it is best to consult with a CPA as the requirements can be complicated.
It is always good for the student to be involved in the college decision making process, including the financing of the college education. With regard to financing, one option may be for the student to save a portion of any money earned from summer jobs for college, or stay at home and commute to a local college so as to forgo room and board charges. Other key decision points include the following:
- Field of study or major: Some majors lead to higher salaries upon graduation than others. Accounting is one of them.
- Family contributions: Sometimes extended family members such as grandparents are willing to contribute to the financial cost of college through gifting as a means of estate planning.
- Work: Once the student is at college, he or she may want to consider working part time or during the summer to meet some of the financial obligations.
The cost of college should be weighed against the benefits that derive from a college education. The major benefits, of course, are higher average pay in careers that follow graduation, but college is a great place to find meaning in life, pursue self-fulfillment, meet persons from diverse background, gain maturity, and of course to learn about the world. Consult a CPA for additional expert advice on the cost/benefit analysis. For more resources, including a CPA locator and articles on saving for college, visit www.picpa.org/moneyandlife