Education is a foundation for children to develop into healthy, productive adults. Part of that journey may include attending college, but will they be able to afford to attend the college of their choice? Will they be able to afford college at all?!
Putting children through college is often one of the largest expenses families will ever encounter. We all want what is best for our kids, but how do we balance saving for their education while at the same time keeping our retirement savings on track? It can be a daunting task to stare in the face, but having a plan will help you succeed. Back-to-school season is a great time to reevaluate college savings goals for your children, grandchildren, or other family members.
Sticker Shock
College Tuition costs continue to rise across the country at a significant pace. JP Morgans guide to education savings shows a 5.7% averge annual increase in tuition rates since 1983. Colleges and Universities are facing supply chain issues, staffing shortages, and demand for higher wages as employees are dealing with elevated inflation in their daily living expenses. The more selective a school, the more flexibility they have to raise tuition without the increase hurting enrollment.
According to the College Board’s Trend in College Pricing 2023-2024, the average all-in price per year for a four-year in-state public college is $28,840, an out-of-state public college rolls in at $46,730, and the cost of a private college starting this fall would be $60,420. In the Bay Area, the current cost of Cal Berkeley (in-state) is $38,030, while Stanford comes in at a robust $89,667 per year all-in. At Bedell Frazier, we project college inflation at 6% per year when planning. Add up four years of college expenses with a 6% inflation rate and you are looking at a large, daunting number.
College Financial Planning
We can help you estimate how much you will need to save for a child’s college education with just a few data points. Our financial planning software can project how much you need to save each year with a few pieces of information. Fill out the brief web form below, and we will be able to run a projection for you. We can run multiple college scenarios if the child and parents aren’t currently aligned on college choice, and we can even model the student picking up a percentage of college expenses.
We typically advise saving between 50% and 75% of college expenses in a college education savings account, not 100% of the cost. It is a good idea to have some savings in a regular taxable account to cover some non-reimbursable expenses like food outside the cafeteria plan, daily living expenses, and travel to and from campus. Children also may not end up going to college, in which case the beneficiary on the account can be changed.
This college saving analysis will let you know how much you need to save each month or year to reach your college education goal. The earlier you start, the better; use the power of compounding growth to let your returns flourish. Don’t allow time to get away from you so that you have to play catch up on saving for such an important goal. Having a plan in place can help you from becoming overwhelmed with the total price tag.
529 Education Savings Plans
One of the most popular savings vehicles for college is a 529 college savings plan. They invest only in mutual funds, with the fund options being determined by which state plan you choose. You don’t need to invest in the state plan where you reside; compare the state plans to see which is the best fit for you. Some states allow a tax deduction if you reside in that state and contribute to a 529 plan, California does not. Check with your state – or contact us!
There are no annual contribution limits on a 529 plan, however, there are aggregate contribution limits. Contributions to a 529 plan count as gift for gift-tax purposes. The current annual gift tax exclusion stands at $18,000 per beneficiary ($36,000 for gifts from a married couple). There are also no income restrictions for contributions. Both parents and grandparents can open accounts for the same beneficiary.
The 529 plan also allows a donor to make five years of donations lumped ($18,000 x 5) into one large deposit of $90,000 with no gift tax implications. This can be a good estate planning tool as the $90,000 is outside of the donor’s estate, but they still are in control of the assets. The 529 plan is an investment account that lets the donor control the funds while keeping them in their own name. With few exceptions, the named beneficiary has no legal rights to the funds, unlike a UGMA/UTMA where the child takes control of the assets once they reach legal age. If the child who is named beneficiary chooses not to go to college, you can repurpose the money.
The 529 assets grow tax-free and the withdrawals on qualified expenses are tax-free. If the money is used for some other purpose, the earnings are taxed as ordinary income and there is a 10% penalty. Those taxes and penalties are only on the earnings, not the principal. The 529 has the flexibility of changing the beneficiary within the family with no penalty if the student decides not to attend college.
Legislation has been passed over the last couple of years that has enhanced some of the capabilities of a 529 plan which is beneficial for parents and grandparents that are looking to save for college. The Tax Cuts and Jobs Act of 2017 allows up to $10,000 a year per beneficiary to pay for K-12 tuition expenses (residents of California are subject to state income tax and an additional 2.5% California tax on funds used for K-12 tuition. Check with your state of residence.) The SECURE Act passed in 2019 opened the door for student loan repayments up to $10,000 per borrower (lifetime limit) for the beneficiary of a 529. California aligns with federal law on this, check whether your state of residence considers student loans as a qualifying expense.
Coverdell Education Savings Account (ESA) – Another type of education funding tool is a Coverdell ESA that offers tax-free earnings growth with tax-free withdrawals when the funds are spent on qualified education expenses. Qualified education expenses include tuition, books, fees, supplies, computers and sometimes room and board. A Coverdell has some limitations: You can only deposit up to $2,000 a year into the account (the $2,000 limit is across all accounts for the same beneficiary), there are income phase outs limits based on the contributor’s income, and contributions must stop with the beneficiary reaches age 18. In addition, all the funds must be spent by age 30. One advantage of the Coverdell ESA is that it can be used for many K-12 expenses, including tuition, books, supplies, uniforms, and even room and board.
Utah MY529
We don’t just help clients plan for college, we can also implement the plan. Bedell Frazier manages 529 college savings plan accounts for clients using the Utah My 529 plan, which is one of only three Gold Rated 529 state plans as ranked by Morningstar. The Utah My 529 plan is the only one that has been rated consistently Gold since Morningstar debuted the ratings in 2012. This allows us to plan for future college costs and implement the plan to get you where you want to be. We monitor the investments and asset allocation quarterly and adjust when appropriate. The Utah My529 website has some great features, including allowing other family members and friends to donate gifts to a child without revealing the 529 account numbers. We can also set up monthly deposits into 529 accounts as well as a special yearly deposit if you want to set up a gift on the child’s birthday or a holiday.
Learn more about Types of Education Savings Accounts.
College Savings Analysis
The Bedell Frazier Financial Planning Department is here to help you set up your college savings plan. We can run a college savings analysis for you to see if you are on track with your college saving goals and advise you on the next steps. Kids grow up so fast; one day, they’re in kindergarten, and the next, they are entering high school. It’s never too early or too late to start college planning for your kids or grandkids. Please contact us to discuss, we know how important saving for college is!
Please complete the information below and we can run a college savings analysis for you to see if you are on track with your college saving goals and advise on next steps.
