- Powerful tax-advantaged savings plans.
- Alternative roads to higher education for independent minds.
Soaring college costs, and the accompanying explosion in student loan debt, represent a major problem for the economy going forward – and a major financial planning problem for families.
In a recent Wall Street Journal op-ed, financial commentator Andy Kessler noted, “Since 1990, the cost of college has increased at four times the rate of inflation. Student loans are clocking in at $1 trillion…. Something’s got to give. Education is going to change, the question is how and when.”
The good news is that more alternatives to conventional high-cost four-year colleges are emerging. Universities are increasingly offering massive open online courses (MOOCs) that cost a lot less than conventional classrooms. Students seem to learn the material just as well (if not better) in Internet-based MOOC classrooms.
Anyone who is intellectually curious can go to the MIT OpenCourseWare site (ocw.mit.edu) and peruse actual MIT course content for free. Or for one who is thinking of working toward an actual degree, StraighterLine (202-507-7020; www.straighterline.com) offers online courses for less than the price of a theater ticket that count as credits at some universities.
Keepers of Campus Orthodoxy Feel Threatened
by Money Saving Innovation
“Plenty of professors smell a threat to their livelihoods,” observes Kessler. And well they should!
America’s secular academic establishment in the social sciences and humanities has for too long focused too heavily on indoctrinating students in the religion of Political Correctness. Left-wing professors have substituted hard facts and free inquiry with race/class/gender theories that get dogmatically enforced by university administrators. Only 30% of college students today believe strongly that it’s “safe” to hold unpopular opinions on campus, according to a survey conducted by the American Association of Colleges and Universities.
New federal guidelines threaten to make colleges even more hostile to freedom of expression. Veteran political pundit Michael Barone notes that the Obama Administration is now attempting “to force colleges and universities to treat as sexual harassment any language that strikes someone as offensive… So anyone on campus who wants to allege offense can decide what speech is allowed.”
Barone laments, “When I was young, students going off to college left communities where speech was informally but fairly tightly regulated for a campus where free inquiry was allowed. Those days are gone.”
A College Degree: Not What It Used to Be
The college experience isn’t what it used to be; nor is a college degree. In decades past, college degrees were almost guaranteed to be economically valuable, since there were relatively few people with college degrees, and the degree meant something. Today, a college degree is much pricier and less meaningful. (Just ask the throngs of indebted degree holders tending bar and waiting tables.)
If you have kids or grandkids who are preparing for college, you might urge them to think twice about whether a conventional four-year college is the best route. Certainly, it would be nice to be able to give them the option financially to attend college (or trade school or other means of acquiring education/skills). Some career paths will require college degrees.
The ABCs of 529s
The best way to help children or grandchildren pay college costs is the tax-advantaged way! Consider the so-called 529 plan. A 529 plan is one of the most powerful tools for parents and grandparents to help kids pay for college. Earnings and withdrawals from 529 accounts are exempt from federal taxes when they are used in a broad array of higher education expenses, including tuition.
There are downsides, however. Contribution limits and investment options within 529 plans are determined on a state-by-state basis. Since rules and tax consequences vary by state, 529 plans can be confusing. And any 529 money that isn’t deployed for education expenses can result in a 10% penalty, plus potential income taxes on earnings within the plan, when it is taken out.
One way to avoid penalties, according to the Internal Revenue Service: “Funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 for one of your children into a sibling’s plan without penalty.”
With a 529 plan, you can contribute $14,000 per designated child without triggering the gift tax (the gift tax exclusion amount was raised to $14,000 in 2013, from $13,000 last year). Money put into a 529 is not considered by the IRS to be part of the donor’s estate; yet the donor retains full control of the funds.
The earlier in a young person’s life you set up or contribute to a 529 plan, the more time the plan has to pay off financially. It can be well worth consulting with a financial planner in your state who can help you set up a 529 plan.
Education Savings Accounts
Another tax-advantaged way to save for college and certain other educational expenses is through a Coverdell Education Savings Account (ESA). An ESA permits you to contribute up to $2,000 per child under age 18. The contributions aren’t deductible, but the gains are exempt from taxation. The withdrawals are tax-free as long as the money is used for primary or secondary school (college) expenses.
The IRS states, “Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.”
While the contribution limit on ESAs is much lower than 529 plans, ESAs offer more investment options. Like an IRA account, you can invest ESA funds in virtually anything that can be purchased through a typical brokerage account.
You may take advantage of Education Savings Accounts as long as your modified adjusted gross
income is less than $110,000 ($220,000 if married). If you exceed the income limitation, you may still be able to gift money to grandparents or other relatives, or even your children themselves, and have them establish an Education Savings Account. IRAs must be funded
with “earned income,” but no such provision applies to Education Savings Accounts.
Harness the Power of Social Gifting
You can help direct multiple sources of funding to a 529 plan or other college savings account
by setting up an account on behalf of a child or grandchild through GradSave (786-529-8050;
www.gradsave.com). Through the GradSave web site, friends and family can make contributions to the college savings account(s) of a young person. Payment processing fees apply, but they are not unreasonable for typical gift amounts.