College

Saving for College

There are a myriad of factors to consider, but one thing’s for sure--the earlier you start saving the better. Just don’t neglect your own retirement savings

By Robert J. Pyle, CFP®, CFA, AEP®

This is the time of year when high school seniors and their families are sweating out college acceptance letters. Study after study shows that a college degree is still worth it despite the skyrocketing costs. For starters, the pay gap between those with a four-year degree and those with a high school degree is at a record high according to the Bureau of Labor Statistics. Not only are college grads significantly less likely to be unemployed, but on average, they out-earn those without degrees by about $1 million in lifetime wages.

So, while a college education remains the American dream, it is becoming less and less affordable. An Edward Jones study found that only one in six Americans (17%) feel they can afford the cost of a college education for themselves or a family member. In fact, only one in three respondents who earned six-figure incomes felt they could afford the cost of college today.

College tuition at public universities has nearly quadrupled over the past 35 years. The reasons are too complex discuss in detail in this article. Among the leading reasons:

  • High increase in public subsidies for higher education

  • Sharp rise in percentage of Americans who go to college

  • Enormous expansion of the federal Pell grant program

  • Expansion of University administration. Large growth rate in administrative positions – 60% increase between 1993 and 2009.

Suffice it to say, attending college is a lot more expensive than it used to be in both real and inflation-adjusted terms. That’s why we build a 6-percent annual tuition increase into our clients’ college savings plan-- i.e. about 3% MORE than the historical rate of inflation.

The average cost of public four-year university is about $25,000 for in-state tuition, $41,000 for out of state tuition and $51,000 for a private university.

SCENARIO 1: If you earn an average of 5% per year on your college savings plan and college costs increase by 3%, you need to save the following annually:

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SCENARIO 2: If you earn an average of 5% per year on your college savings plan and college costs increase by 6%, you need to save the following annually:

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SCENARIO 3: If you earn an average of 5% per year and college costs increase by 5%, you need to save the following annually:

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Also, many students and families neglect to account for all the “hidden fees” of college beyond tuition, room and board. These can include: Fraternity/sorority dues, clubs, trips, meals outside the cafeteria, and travel to and from school, especially if airfare is required.

How to close the saving gap

Most experts say a 529 plan is the best option for saving for a child’s or grandchild’s education.
The earnings generated in a 529 plan are not subject to federal income taxes, allowing the investments to grow without being depleted annually by taxes. Additionally, when the money is used for qualified education expenses, the distributions from the 529 plan are not subject to federal or state income taxes. Here are seven more key benefits of 529 plans.

What to look for in a 529 plan

For starters, you want low cost and good diversification options. The Colorado 529 Plan has Conservative Age Based, Moderate Age Based and Aggressive Age Based.  For example, age 0-4 it’s 100% stocks in Aggressive vs. 87.5% stocks the Moderate and 62.5% stocks in the Conservative. Each portfolio becomes increasingly more conservative as the child/beneficiary gets older:

Also look at:

  • Past state performance

  • Investment options

  • Asset protection

  • Relative investment fees

  • Any “in-state” advantages of establishing a 529 in your state of residency

You are free to invest in the 529 plan of any state, but the Colorado plan, checks off the boxes for most Colorado families. What’s more, in many states including Colorado, you will also get a state income tax deduction for contributions made to your in-state 529 plan.  If you don’t get a deduction for investing in your own state’s plan, then we recommend the Utah Educational Savings Plan to many of our clients. Here is a helpful chart outlining state tax deductions by plan.

Why a 529 is better than UTMA

I sometimes get asked if The Uniform Trust to Minors Act (UTMA) is better than a 529 plan. There’s really no reason to go with an UTMA since it counts against your financial aid chances five times more than your 529 plan savings do.  Since an UTMA is counted as an asset of the student, then 20% of the money is expected to be used versus 2.6% to 5.6% of the parent’s assets (including 529 plans owned by the parents). One way circumvent this rule is to transfer the UTMA assets to a 529 plan owned by the student and the asset is reported as a parental asset

Here’s another drawback to UTMA: Once a child is no longer a minor (age 21 in Colorado) he or she will take ownership of the account and can spend the money on anything they want, not necessarily for college. By contrast, a 529 account remains with the adult who set up the account and only withdrawals used for education purposes remain tax-free.

Should we start taking risk off the table as my son or daughter gets closer to college age?

In most cases yes, and the “glide path” for college savings is similar to the glide path you would follow for your retirement plan.  As mentioned earlier, you want to maximize the account’s appreciation when your child is young and get increasingly conservative as you get closer to withdrawing from the account for college costs. Most plans allow you to do the reallocations yourself, but I recommend letting the plans do it for you—they’re the pros and they do this all day long.

Should we continue to fund a 529 plan after our student begins college?

Generally, I recommend that clients keep contributing to a 529 plan after their child has enrolled in college as long as they’re in a plan that provides a state tax deduction—in Colorado, it’s 4.625% of what you contribute each year. Plus, you will still earn some appreciation on your principal over the four-plus years that your child is enrolled.

Changing asset allocation based on market conditions

If the markets are going crazy when your child is young—i.e. when your account is likely to have a higher exposure to the stock market—it’s tempting to move into the safer fixed income options your plan may offer. I don’t recommend this approach. Essentially, you’re trying to be a “market timer” and it’s very difficult to know when to “get back in” to the higher growth options your fund offers. Not only do you risk missing out on significant market upside, but many 529 plans have strict limits on the number times you can make asset allocation changes each year. That being said, if the market takes a big drop, it might be a good time to add more money to your 529 plan. Why? Because you’re buying units at relatively low cost.

Asking grandparents for help


Many grandparents are at a point in life when they can make generous gifts to grandchildren, especially if the money is to be used for something as worthwhile as college tuition vs. just buying junior a new car. Just make sure the grandparents’ gift is put in the name of the student/beneficiary’s parents—not the grandparents. That’s because funds in the grandparents’ name are more likely to count against you if your child is applying for financial aid. A withdrawal from a 529 plan owned by a grandparent or other third party is required to be “added back” when reporting income on the FAFSA financial aid form. The amount of the distribution will reduce eligibility for need-based aid by as much as 50% of the amount of the distribution. It counts as untaxed income to the beneficiary.

Don’t count on athletic scholarships

According to this CBS Moneyline report, the odds of getting a scholarship is less than 2 percent and the average scholarship is less than $11,000. Playing high level college sports can still be fun, but just know that if your child or grandchild is among the lucky few to land an athletic scholarship, make sure they absolutely love their chosen sport. It will be at least a 40-hour per week commitment and competition for playing time is extremely fierce since nearly everyone on the roster was captain of their high school team and earned All-League/County/State, etc. honors.  Not to be a dream dasher here, but think about all that money you are putting into your kids’ travel sports teams and private coaching. Suppose instead you invested those thousands of dollars a year in a 529 plan where it could compound for 10 to 15 years?

Retirement savings vs. college savings

One of the toughest challenges many of our clients face is finding the right balance between saving for their childrens’ education and saving for their retirement. If you have two children, the numbers can be overwhelming. If you are thinking about a private four-year college, the amount you need to save for two children is more than maxing out a 401(k) contribution for one person (($30,422 for two kids vs. $19,000 for a 401(k) under 50 or $25,000 over 50.))

There are no quick and easy answers, but we have tools to help our clients model many different scenarios. For instance: “If I save $X for retirement and $Y for my child’s education, is this going to get me to my goals for both?” Then we can look at alternative scenarios in which you save twice as much for your child and look at how much longer you would have to work. Is that acceptable to you and your spouse? That’s a tough balance for most people and requires careful consideration of your timeline, your goals and your aspirations for your children.


Conclusion

In a future article, I’ll discuss the importance of choosing employable majors, additional savings tactics, what to do with unused 529 after your children complete college and whether or not the cost of elite private schools is worth it.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

10 Best College Majors for a Lucrative Career

Here is a nice article by Stacy Rapacon of Kiplinger:

 

By Stacy Rapacon, Online Editor | September 2017

 

College is often considered the surest path to a lucrative career. After all, according to the U.S. Bureau of Labor Statistics, a worker with a bachelor's degree typically earns two-thirds more than someone with just a high school diploma.

 

But not all college degrees are created equal. “Increasingly, students want to understand the career and income opportunities associated with their college education,” says Lydia Frank, PayScale vice president, in a statement.

 

To determine which majors typically come with the best hiring prospects and pay, we analyzed data for 126 popular college majors. We looked for courses of study that tend to lead to fat paychecks—both right out of school and farther along your career path. We also sought out majors that are in high demand based on recent online job postings as well as long-term growth expectations for related occupations. Plus, we factored in the percentage of workers with given degrees who feel their jobs are having a positive impact on the world because having a sense of purpose can be just as important as having a good payday.

 

Our top 10 majors present interested scholars with the best shots at success and satisfaction in the workplace, complete with generous incomes and an abundance of job opportunities. Check out the best college majors for a lucrative career. (Spoiler alert: STEM majors—that is, fields in science, technology, engineering and math—dominate our rankings.)

 

For each of the 126 college majors, compensation research firm PayScale provided median annual salaries for entry-level workers (with five years or less of work experience) and mid-career employees (with at least 10 years of experience). PayScale also provided “high job meaning” scores, which indicate the percentage of workers with given college majors who say their work makes the world a better place. Workforce research firm Burning Glass Technologies supplied the number of online job postings listed between the third quarter of 2016 and the second quarter of 2017 that were seeking applicants with each of the 126 college majors. Projected 10-year growth rates from 2016 to 2026 for related occupations came from Economic Modeling Specialists International (EMSI), a labor-market research firm owned by CareerBuilder. EMSI collects data from more than 90 federal, state and private sources, including the U.S. Bureau of Labor Statistics. In finalizing our rankings, we combin ed some similar majors to avoid redundancy.

 

10. Finance

 

•Starting salary: $53,300 (median for all majors: $43,250)

•Mid-career salary: $93,200 (median for all majors: $74,700)

•Annual online job postings: 1.4 million

•Related job: Financial Analyst

•Projected 10-year job growth: 13.1% (all occupations: 8.6%)

 

At Kiplinger, we totally get that money matters can be complex, and many of us—especially the growing number of people rapidly approaching retirement age—need help understanding and managing them. No wonder workers with financial knowledge are in such high demand. New regulations, more products and increasingly complex investment portfolios don’t hurt either. And that need translates into plenty of opportunities and generous pay for workers in this field. Financial analysts, who evaluate investment opportunities for businesses, earn a median salary of more than $80,100 a year. Personal financial advisers, who are expected to add 23.8% more positions by 2026, typically earn about $86,800 a year.

 

Finance isn’t strictly considered a STEM field, but you can still expect to work with numbers a great deal. High school students interested in finance can prepare for this major by studying statistics and calculus. In college, you'll add to your schedule accounting, financial markets and investing, as well as microeconomics, macroeconomics and economic theory. If you pursue a bachelor of arts degree in this field, you likely have to take liberal arts and foreign language classes, too.

 

9. Actuarial Mathematics

 

•Starting salary: $56,400

•Mid-career salary: $131,700

•Annual online job postings: 25,613

•Related job: Actuary

•Projected 10-year job growth: 17.5%

 

You'll find little risk in pursuing an actuarial career. These professionals—who work in the insurance and finance industries, analyzing the costs of risk and uncertainty—are in high demand. New and ever-changing health care laws and financial regulations help drive companies' needs for their services, and their usefulness is well compensated: Actuaries enjoy a median salary of more than $97,000 a year. For even better pay, an actuarial degree can also lead you to becoming a financial manager, who typically earns nearly $116,500 a year. In general, actuarial mathematics leads to the second-highest mid-career salary of all our 126 majors.

 

Expect your graphing-calculator usage to be exponentially higher in college. You likely already warmed it up in high school with advanced placement calculus or statistics. In college, you can expect to take micro- and macroeconomics, probability and risk theory courses, too.

 

8. Physics

 

•Starting salary: $58,000

•Mid-career salary: $108,000

•Annual online job postings: 115,056

•Best related job: Physicist

•Projected 10-year job growth: 11.0%

 

It won't take much force to accelerate a physics major toward a lucrative career (regardless of mass). While the clearest career path to take with this degree leads to work as a physicist, you typically need to get an advanced degree along the way. (It might be worth the extended and more expensive journey, if you’re so inclined: Physicists do have a promising projected job growth rate and a generous median annual salary of nearly $111,600.) Other jobs to consider with a bachelor's in physics include aerospace engineer, computer engineer or civil engineer—all of which offer above-average growth projections and pay.

 

Various physics classes including computational, modern and nuclear physics obviously will fill your schedule. You should also be prepared to do a lot of math, work on experiments both independently and with classmates, and apply your problem-solving skills.

 

7. Business Administration

 

•Starting salary: $46,300

•Mid-career salary: $76,800

•Annual online job postings: 3.7 million

•Best related job: Operations Manager

•Projected 10-year job growth: 11.2%

 

If you want to spend your college years studying how to be boss, this would be a great major for you. It certainly worked out well for billionaire Warren Buffett, who holds a bachelor’s degree in this field from the University of Nebraska-Lincoln. While a business administration major might not strictly fall into the STEM classification, you should probably get comfortable with numbers if you want to study it. Possible courses include accounting, statistics and economics, along with slightly less numerically focused classes such as business ethics and law, marketing and business policy and strategy.

 

And though you’re preparing for a career aimed at the top of the job ladder, with this major, you maintain a wide reach for where your career can go, in terms of industry. Workers with this degree wind up in a diverse array of jobs, including accountants, sales supervisors, financial managers and many other management positions. With such workplace agility, no wonder 76.3% of former business administration majors are employed full time, according to the Brookings Institution’s Hamilton Project, which promotes U.S. economic growth and competitiveness.

 

6. Management Information Systems

 

•Starting salary: $57,900

•Mid-career salary: $101,300

•Annual online job postings: 2.6 million

•Related job: Computer and Information Systems Manager

•Projected 10-year job growth: 17.9%

 

Combining tech savvy with leadership abilities can be a winning career formula. Information systems focuses on the study of implementing technology within a company or organization. The management portion of your studies homes in on the business side of the field. In addition to your computer courses, you will study sociology and psychology, Internet ethics and project management. In fact, many universities offer this degree through their business schools.

 

Your MIS degree can lead you to many different computer-related career paths. Among the most common and highest paid positions is as an information systems manager. On top of the above-average growth in demand, this job earns a median $130,400 a year. But it will take at least a few years of work experience to climb to this management role. And many employers prefer candidates with MBAs. With a bachelor's, you can break into the field as a computer systems analyst, who can expect to earn median pay of more than $85,000 a year and enjoy a projected long-term growth rate of 22.0%.

 

5. Computer Science

 

•Starting salary: $65,900

•Mid-career salary: $110,100

•Annual online job postings: 2.0 million

•Related job: Software Developer

•Projected 10-year job growth: 21.6%

 

It should be no surprise that computer-related fields frequent this list of best college majors. Computers are everywhere, and people who know how to make, modify and master the machines are in high demand—and compensated in kind. Developers of both applications and systems software (among our Best Jobs for the Future) typically earn about $96,461 and $103,083 a year, respectively.

 

Along with computer science majors, students focusing on computer engineering and software engineering have promising career prospects, too. Software engineering majors go on to earn an annual median salary of $104,300 after ten years on the job. Those entering the field now can find 760,530 online job postings seeking their degrees. Computer engineering majors do even better with median mid-career pay of $116,000 and over 1.5 million online job postings.

 

All these majors take a lot of technology-focused classes, of course, such as computer science and programming. Business and communications classes can help, too, since many employers prefer high-tech workers with business skills and communication capabilities on top of standard tech savvy.

 

4. Mechanical Engineering

 

•Starting salary: $64,000

•Mid-career salary: $106,800

•Annual online job postings: 241,345

•Related job: Mechanical Engineer

•Projected 10-year job growth: 9.4%

 

In the broadest of engineering fields, these majors study machines, including what they’re made of and how they work, with courses such as circuit analysis, fluid mechanics, materials science and thermodynamics. Sound like a lot to cover? You’re not wrong. Indeed, mechanical engineering students often take five years (or four years including a couple of summers) to complete their degrees because they take on internships for hands-on work experience that complements their theoretical studies. The good news is these cooperative programs do include paid gigs, so you can offset some of those educational costs.

 

And it likely all pays off in the end. These degree holders tend to have little problem finding work with 85.1% being employed full-time, according to the Hamilton Project. Most majors go on to become mechanical engineers (obviously), who have a median salary of more than $83,400 a year. But some also find other well-paying jobs as other types of engineers, including civil and aerospace, and even as software developers and similar positions.

 

3. Civil Engineering

 

•Starting salary: $57,700

•Mid-career salary: $98,500

•Annual online job postings: 201,886

•Related job: Civil Engineer

•Projected 10-year job growth: 10.5%

 

A number of engineering fields are well known for paying well. Petroleum engineering, for example, turns out the top earners of all 126 majors we analyzed with an impressive median pay of $175,500 a year for mid-career workers. However, the size of the job market, with just about 33,200 petroleum engineers in the country, means scant opportunities for those looking to join the field. (Its inextricable tie to the volatility of oil prices also makes it difficult to recommend, especially right now.)

 

For civil engineering students, the potential median pay might not be quite as high (although Mexican business mogul Carlos Slim studied civil engineering, and he’s one of the richest men in the world), but the employment prospects are much better. Civil engineers, who design and supervise the construction of airports, sewer systems and other large projects, are expected to add more than 30,600 positions to their already robust ranks of nearly 292,000 by 2026.

 

An inclination toward math and science would make you a good civil engineering candidate. Your course load would include fluid mechanics, statics, structural analysis and design, and thermodynamics. Also be prepared to think through many word problems and work on group projects.

 

2. Biomedical Engineering

 

•Starting salary: $62,900

•Mid-career salary: $103,500

•Annual online job postings: 51,070

•Related job: Biomedical Engineer

•Projected 10-year job growth: 23.2%

 

The increasing overlap between biology and technology is expanding the field of biomedical engineering. For example, three-dimensional printers and smartphone apps being applied to health care helps drive demand for biomedical engineers, who design, create and maintain such equipment and software. And the aging population boosts the need for biomedical devices and procedures, such as hip and knee replacements, as we continue to live and remain active longer.

 

It helps to have a creative mind and an ability to problem-solve, as well as an interest in medicine, to succeed in this field. Expect a schedule packed with science and technology courses, such as anatomy, organic chemistry, robotics and computer programming.

 

1. Nursing

 

•Starting salary: $58,200

•Mid-career salary: $76,300

•Annual online job postings: 1.9 million

•Related job: Registered Nurse

•Projected 10-year job growth: 17.2%

 

The need for nurses is as persistent as the common cold. In terms of demand, most health care professionals, in general, benefit from the aging population, as well as an increasing number of insured people, which was brought on by the Affordable Care Act. Regardless of what may happen with health care coverage in our country, prospects for registered nurses (RNs) are promising—and even more so for nurse practitioners (NPs), whose ranks are expected to grow a whopping 32.3% by 2026. Both professions are among our best jobs for the future. NPs typically make nearly $98,288 a year; RNs earn a median $67,418 a year. And the field is as rewarding as it is lucrative: 82% of employees with this degree report feeling a high sense of meaning in their careers, according to PayScale.

 

To reach RN ranks, nursing students must take many science courses, including anatomy, chemistry, microbiology and nutrition. You also get supervised clinical experience in various specialties, such as pediatrics, psychiatry and surgery. And you'll have to pass the National Council Licensure Examination to get your license (additional requirements vary by state). NPs must head back to school longer to obtain a master's or doctoral degree.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

FAQs About Investing In 529 Plans

In a recent post, we addressed a frequently asked question about determining where you stand with your overall investing. Today, let’s focus in on a subject near and dear to many investors’ heartfelt goals: funding their children’s higher education. 

 

To help families save and invest for college, Congress created the tax-advantaged 529 plan in 1996, named after Section 529 of the Internal Revenue Code. Today, you’ll find that most states and some educational institutions offer 529 plans. 

 

While there are often good reasons to establish a 529 plan for college savings, there also are many factors to be weighed and choices to be made along the way. Savingforcollege.com is a great resource to learn more, but here are two of the biggest questions we regularly encounter. 

 

How do 529 plans work in the accumulation and withdrawal phases? 

 

During accumulation – that is, as you’re saving for college – you contribute on a periodic basis and the money goes into the 529 plan of your choice. All 529 plan money grows federally tax-free. Your state may or may not give you an additional state tax break on 529 plan contributions.  

 

Different plans offer different investments, and you typically don’t have to use your own state’s plan. When doing your due diligence, you may find a different state’s plan looks like an overall better deal. Or you might even be better off investing the money in your taxable accounts instead of typing it up for college costs. Bottom line, it’s worth taking the time to consider all available options before deciding which are right for you. 

 

When you’re ready to withdraw money from your 529 plan, you typically reach out to the plan provider and request a check. Or you can usually set up an online account and have payments sent there. As long as the money is used to pay for qualified higher education expenses, the withdrawals will not be taxed. 

 

Can I transfer the money to another child?

 

When you establish a 529 plan, you name a beneficiary for whom it is to be spent. What happens if that person is not going to be using it after all? Fortunately, you have some flexibility: 

 

•  You can change the beneficiary to another family member who is planning to attend college. 

 

•  You can keep the money in the account in case the beneficiary plans to attend graduate school at a later date. 

 

•  You can make yourself the beneficiary in case you want to go back to college, or if you might later change the beneficiary again to a different family member. 

 

•  Worst-case scenario, you can take out the money as a non-qualified withdrawal, paying taxes, plus a 10% penalty on the prorated earnings. 

 

As you might expect, there are some caveats and qualifications on these rules of thumb … and sometimes the rules evolve over time. Whenever you are establishing or making changes to your 529 plan, we advise checking in with an investment professional to help you consider all the angles, crunch all the numbers and make optimal choices for you and your family.

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Making the Grade: Test Your Knowledge of Key College Planning Facts

The latest report on college costs published by the College Board brought some good news: The increases in tuition and fees for the 2014-2015 academic year were lower than the average annual increases in the past 30 years across all sectors included in the study.

 

Yet even though college price increases are not accelerating, the report's authors affirmed that, in real terms, college costs have been rising for decades. For instance, the report, "Trends in College Pricing 2014," revealed that the inflation-adjusted average published price for in-state students at public four-year universities is 42% higher than it was 10 years ago and more than twice as high as it was 20 years ago. In the private nonprofit four-year sector, the increases were 24% over 10 years and 66% over 20 years.

 

Given this reality, it is easy to see why devising a plan to pay for college is a major stressor for many American families. Underlying that anxiety are numerous misconceptions about the financial aid process and how a family's savings might affect a student's eligibility to receive aid.

 

Further, there also seems to be a general lack of knowledge about college savings vehicles, specifically 529 college savings plans -- how they work, and the many benefits they have to offer families struggling to juggle multiple financial goals.1

 

529 plans have altered education planning in much the same way that the 401(k) altered retirement planning. A unique combination of features -- high contribution limits, professional asset management, account holder control of assets, flexibility in transferring the money, and perhaps most important, generous tax advantages -- have solidified the 529 plan's position as a leader in the education planning world.

 

Test Your Knowledge

 

Here's your chance to test your knowledge about college planning and 529 plans. We hope that the information shared here will shed new light on some of the details of the process.

 

1.What form do all colleges require of students applying for financial aid?

 

_____ CSS Financial Aid PROFILE

 

_____ FAFSA

 

_____ EFC

 

Answer: FAFSA. Any college or university that awards federal student aid requires the Free Application for Federal Student Aid (FAFSA). For the majority of colleges this is the only aid application required. The CSS Financial Aid PROFILE is required by some private colleges for assessing eligibility for the specific college's institutional aid dollars. The Expected Family Contribution (EFC) is a number calculated by the financial aid forms.

 

2.Saving for college in a 529 college savings plan negatively impacts eligibility for financial aid.

 

_____ True

 

_____ Maybe, but often the effect is minimal in the financial needs-analysis process

 

_____ False

 

Answer: Maybe, but often not enough to worry about. The value of a 529 savings plan account set up by a parent or legal guardian is reported as a parental asset on the FAFSA and only increases the EFC by a maximum of 5.64% of the total account value. 529 plans and Coverdell Education Savings Accounts tend to be two of the better options for saving for college without jeopardizing financial aid. Income is generally more of a determinant of need-based financial aid eligibility or lack thereof.

 

3.Assets held in a 529 college savings plan can be used to pay for what type of school?

 

_____ Four-year college or university

 

_____ Two-year community college

 

_____ Qualified trade school

 

_____ All of the above

 

Answer: All of the above. With a 529 savings program, you can use your account at any accredited college or university in the country (and some outside of the country).

 

4.What happens to the 529 college savings funds if the student does not go to college?

 

_____ The money can be used by another family member to pay for qualified expenses

 

_____ The federal government will seize the account

 

_____ Nothing

 

_____ The plan will be declared void, and the money returned to the plan owner

 

Answer: You may generally change the beneficiary. That money can be used by a sibling, cousin, or other family member for qualified higher education expenses, without penalty.

 

5.529 assets held in the grandparent's name are shielded from the needs-analysis process.

 

_____ True

 

_____ False

 

Answer: True. Assets saved in the name of a grandparent are not reported on the FAFSA and do not typically count toward the EFC.

 

Caution: Distributions from a grandparent-owned 529 plan used to pay for a student's college expenses generally weigh heavily in the federal needs-analysis process and are typically counted as student income on the following year's FAFSA form, with an assessment rate of 50%.2

 

6.529 plan distributions from a parent-owned 529 account do not increase the family's EFC.

 

_____ True

 

_____ False

 

Answer: True. Unlike distributions from a grandparent-owned account, distributions from a parent-owned 529 plan that are used to pay for a dependent student's college expenses are not reported on the FAFSA and do not typically count as income in the federal needs-analysis process.2

 

7.What is assessed most heavily in the federal financial aid formula for dependent students?

 

_____ Student's income

 

_____ Parent's income

 

_____ Student's assets

 

_____ Parent's assets

 

Answer: Student's income is generally assessed at the highest rate. The federal formula considers up to 50% of a dependent student's income as being available to pay for college. Here are the approximate rates for the primary financial resource categories that are assessed in computing an EFC:

 

•Student's income Up to 50%

•Parent's income 22% to 47%

•Student's assets 20%

•Parent's assets 2.6% to 5.64%

 

8.Federal loans tend to be the most common type of financial aid used for the education of dependent undergraduates.

 

_____ True

 

_____ False

 

Answer: True. For many families, the lion's share of financial aid is in the form of federal loans often supplemented by private loans, particularly when incomes are above a certain level and many need-based grants have been ruled out.

 

Important caveat: If you combine all grant/scholarship aid dollars from all sources for all undergraduates, the amount would exceed the total federal loan dollars. Federal loans constituted 34% of total undergraduate student aid in 2013-14, according to the College Board.

 

How did you do? Hopefully this information has helped you to better understand the financial aspects of college planning -- in particular the powerful but somewhat complex 529 college savings plan. To learn more about 529 plans and selecting the right plan for your situation, contact a qualified financial advisor.

 

For more on the financial aid process, the following organizations offer ample, free information:

 

•The College Board: Call your regional office or visit collegeboard.org.

•FinAid: Visit http://www.finaid.org.

•U.S. Department of Education, Federal Student Aid Information Center: Call (800) 433-3243 or visit www.fafsa.ed.gov.

 

Source(s):

1.  Investing in 529 plans involves risk, including loss of principal. Before you invest in a 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.

2.  Note that some private colleges may treat the needs-analysis process a little differently from what is reported here, and generally the comments in this document apply to the federal needs-analysis process. Individual situations will vary.

The College Board, "Trends in College Pricing 2014," November 13, 2014.

Wealth Management Systems Inc., "Increasing 529 Sales & Savings Rates: The Role of Personalized Planning Tools and Education: Part 2," June 2015.

The College Board, "Trends in Student Aid 2014," November 13, 2014.

Forbes, "How Much Do You Know About a 529 Savings Plan? [Quiz]," June 23, 2015.

 

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. 

© 2015 Wealth Management Systems Inc. All rights reserved.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Coverdell, Custodial Account, or 529? How to Choose

First the bad news: The cost of a college education has skyrocketed, increasing at a rates well above the general inflation rate in recent years. Now the good news: Your options for setting aside college money in tax-efficient investment accounts have increased as well. For example, in 2001 Congress enhanced 529 plans and Coverdell Education Savings Accounts (formerly known as Education IRAs). Other time-tested strategies, such as contributing to a minors custodial account (UGMA/UTMA accounts), continue to offer potential benefits as well.

 

The Lowdown on 529 Plans

Created in 1996 and named after the section of the federal tax code that governs them, 529 plans are generally sponsored by individual states, but in some cases may also be sponsored by qualified educational institutions. They are administered by investment companies, which also oversee the underlying investments. There are two types of 529 plans:

 

Prepaid tuition plans let participants pay for future tuition at today's rates, essentially taking inflation out of the equation. These plans are generally available only to residents of the sponsoring state and may be intended for in-state tuition (participants may be able to use the money at out-of-state schools, but only a reduced percentage of the balance in some cases).

College savings plans -- the focus of this article -- let participants invest their contributions in portfolios of mutual funds or similar managed financial instruments. Money in a college savings plan can be used for qualified undergraduate and graduate expenses at any accredited college or university. Many of these plans are national plans: No matter which state or school sponsors them, residents of any state can participate. With some 529 college savings plans, contributions are allocated to a particular portfolio based on the child's age. As the child nears college age, the money shifts to different portfolios with appropriate risk and return potential. Other 529 plans offer greater investment flexibility, letting the account holder choose from a range of securities.

 

The potential advantages of 529 plans include:

• Tax-free earnings -- Earnings in a 529 plan accumulate free from taxes, and qualified withdrawals are federally tax free. Withdrawals may be exempt from state taxes as well (tax rules vary from state to state). Nonqualified withdrawals from a 529 plan may be subject to income taxes and a 10% additional federal tax.

• Gift tax benefits for contributors -- A contribution to a 529 plan is considered a gift for federal tax purposes. Tax rules currently let you give up to $14,000 in 2015 to as many individuals as you choose, free from federal gift taxes. Gifting schedules can also be accelerated through a lump-sum contribution of $70,000 to a 529 plan in the first year of a five-year period.

• Generous contribution rules -- Lifetime contribution limits on 529 plans vary from state to state, but often exceed $200,000 per beneficiary, including earnings. In addition, there usually are no income restrictions on contributors to a 529 plan.

• Account control -- The individual who creates a 529 plan account on behalf of a beneficiary generally maintains complete control over the account. This is not the case with Coverdell Education Savings Accounts or certain types of custodial accounts. Account owners may also change beneficiaries.

 

Finally, contributions to 529 plans may provide a state tax deduction for residents of the sponsoring state.

To identify the 529 plan that best suits your needs, ask the following questions about each one you evaluate: Can you transfer account ownership? What are the contribution limits? Are the investment choices appropriate for your needs? Are there any fees? Is your intended school considered a qualified institution by the IRS? You may also want to work with a financial advisor to narrow down your options.

 

UGMA/UTMA Accounts: Awarding Custody

Of course, not all college savings strategies require the involvement of a college or a state government. For example, by following the guidelines established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) -- each state uses one or the other -- adults such as parents and grandparents can establish and contribute to a custodial account in a minor's name without having to establish a trust or name a legal guardian.

Contributing to an UGMA/UTMA account can accomplish two goals simultaneously: helping a future student prepare for college costs and reducing the value of a contributor's taxable estate. UGMA/UTMA accounts also offer favorable tax treatment of investment earnings. For example, the first $1,000 of earnings is tax free each year. If the minor is under 19, earnings in excess of $1,000 but not above $2,000 are taxed at the child's rate. If earnings exceed $2,000 for children under 19, the income is taxed at either the parents' rate or the child's rate, whichever is higher. If the child is older than 19, all income is taxed at his or her rate. Note that the age limit increases to 24 for a full-time student if the child doesn't have earned income in excess of half of his or her annual support.

Despite the obvious appeal of UGMA/UTMA accounts, it's worth noting that the assets in the account belong to the child, not to the contributor. When the child reaches legal adulthood at age 18 or 21, depending on the state, he or she is free to spend the money with no restrictions. In other words, contributors cannot force that individual to use the money for college costs.

 

Coverdell: New Name, Better Benefits

The Education IRA, as we knew it, had a relatively short life. In 2002, just five years after its creation, the popular college savings account was renamed the Coverdell Education Savings Account, after the late Senator Paul Coverdell. But that's not the only change worth noting. Contribution limits also increased, income eligibility for married taxpayers rose, and the range of eligible education expenses expanded considerably.

Coverdells are qualified investment accounts that allow nondeductible contributions of up to $2,000 annually per beneficiary. Earnings in the account are not taxed, and as long as withdrawals are used for qualified education expenses, they are tax free as well. Assets in a Coverdell must be used before the beneficiary's 30th birthday. Keep in mind that the designated beneficiary of a Coverdell account is free to take withdrawals at any time, but any amount in excess of his or her qualified education expenses will be taxable as income. A 10% additional federal tax may also apply.

Coverdells also have a special feature unavailable with 529 plans: Qualified withdrawals may be used to pay for an elementary, secondary, or college education. Withdrawals from 529 plans can only be used for college expenses. Unlike 529 plans, Coverdells impose income eligibility limits on contributors. Single filers with modified adjusted gross incomes of more than $110,000 and joint filers with incomes of more than $220,000 cannot contribute.

The deadline to contribute to a Coverdell is generally April 15, the same deadline that applies to IRAs. Before making a decision about a Coverdell, evaluate the investment options, fees, and services offered by competing financial institutions that provide the accounts.

Finally, when choosing a college investment vehicle, remember that it may not be a "one or the other" decision. It may make sense for you to contribute to more than one type of account simultaneously. Speak with a financial and tax advisor about your particular needs.

Points to Remember

1.  529 college savings plans let participants invest money in portfolios of mutual funds or similar investment vehicles to be used for qualified undergraduate and graduate expenses at any accredited college or university. They offer the potential for tax-free withdrawals and a wide range of other features and benefits.

2.  UGMA/UTMA custodial accounts may offer estate tax breaks to contributors, as well as income tax breaks. However, when the minor reaches the legal age of adulthood, the money can be spent however he or she chooses.

3.  Coverdell Education Savings Accounts allow tax-free growth and withdrawals of earnings for qualified expenses, but contribution and income limits may restrict their effectiveness for some taxpayers.

4.  Unlike 529 plans, Coverdells allow tax- and penalty-free withdrawals for elementary and high school expenses, in addition to college expenses.

 

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. 

© 2015 Wealth Management Systems Inc. All rights reserved.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.